The US Federal Reserve plans to cut interest rates twice before the end of 2024, first in September and then again in December. This comes on the back of stronger consumer spending, easing inflation, and falling jobless rates.
Of course, expats and investors are keen to understand how the rate cuts will play out in the grand scheme. Let's break it down.
1. Impact on bond investors
Interest rates and bond prices have an inverse relationship. When the Fed cuts rates, existing bonds with higher interest rates become more attractive.
This drives up their prices. Bond investors can expect an increase in the market value of their existing bond holdings.
But the other way around is often true for new bonds. Investors looking to buy US bonds post-rate-cut will likely face lower returns.
This may prompt a shift in investment strategies towards bonds issued before the rate cuts or other asset classes. That's especially true for fixed-interest products like bonds in more favourable markets like Europe, property loan notes, mutual funds, or capital notes.
2. Impact on property investors
Fed rate cuts typically lead to lower mortgage rates. That translates to cheaper borrowing, stimulating the housing market and increasing property values and rental income opportunities.
Investors may find it easier to finance property acquisitions, leading to increased investment in real estate. This could be particularly beneficial for sectors like residential and commercial real estate.
3. Impact on US treasury bills
Treasury bills, being short-term securities, are highly sensitive to changes in interest rates. The first victim of the cut will likely be treasury bill yields.
Still, there will be increased demand for short-term, fixed-interest products, especially for keen investors looking for short-term parking of funds.
4. General market effects
Lower interest rates often lead to increased corporate profits due to reduced borrowing costs, which can boost stock prices. The stock market may experience a rally, offering additional investment opportunities but also introducing potential volatility as markets react to the rate cuts.
What investors and expats can do
Diversify your investments: Balance lower yields on bonds and treasury bills with potentially higher returns from equities, loan notes, and real estate.
Timing can make a difference: Property investors might accelerate purchase plans to lock in lower mortgage rates. Bond investors may want to pick up existing bonds before their prices increase.
Reassess risk: Lower rates might push some investors towards higher-risk assets in search of better returns. A thorough risk assessment can help.
Consider citizenship by investment: The changing market outlook might make a second home with tax benefits through citizenship or residency golden visas more attractive.
For expert guidance on citizenship by investment, retirement planning, and tax advice tailored to these changing times, consider consulting with International Wealth Ventures.