What to Do Now That Interest Rates Are So Low

Just a few months ago, it seemed like a sure thing that before long a recovering economy would begin to push up interest rates. That likelihood promised to provide relief for yield-starved savers — but also end a period of rock-bottom interest rates for mortgages and car loans and pose a threat to many bond investors. That picture has changed ­drastically. The US economy is barely growing and possibly even sinking into a second ­recession. And the Federal Reserve says that it intends to keep short-term interest rates near 0% through mid-2013. So you may want to rethink your strategies whether you are a saver, an investor, a borrower, a credit card user — or even a traveler. Here, eight personal finance experts give their recommendations on what to do now…


Upgrade to an online savings account. This is more important now than ever. The average yield on savings and money market accounts offered by banks is about 0.15%, and even less for money market mutual funds offered by brokerage firms. You can improve that by up to one full percentage point — an extra $1,000 a year on a $100,000 balance — and do so risk-free by opening an FDIC-insured savings account over the Internet. Examples: Sallie Mae Bank High-Yield Savings Account, recent yield: 1.1%, www.SallieMae.com… Discover Bank Online Savings, 1.1%, www.DiscoverBank.com… American Express Bank High-Yield Savings Account, 1%, www.PersonalSavings.americanexpress.com.

Richard Barrington, CFA, is the personal finance expert at MoneyRates.com. He is based in Macedon, New York.

Look for five- or 10-year certificates of deposit (CDs) with low early-withdrawal penalties and relatively high yields. You will benefit if interest rates in general stay low for many years — but you can cash out and reinvest without too much pain if interest rates go up before your CDs mature. Recommended: Discover Bank 10-year CD — the annual yield is 3% with an early withdrawal penalty equal to nine months of simple interest (2.25%) on the amount withdrawn (800-347-7000, www.DiscoverBank.com)… Ally Bank five-year CD — which has a 2.17% yield and a penalty equal to two months of simple interest (0.36%) on the amount withdrawn (877-247-2559, www.Ally.com).

Allan S. Roth, CPA, CFP, is president of Wealth Logic, LLC, a financial advisory firm in Colorado Springs. He is author of How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn (Wiley).


Consider a municipal bond exchange-traded fund (ETF). While states and municipalities face tough fiscal challenges, they still can be viewed as a safe haven for jittery investors seeking a tax break. Muni defaults so far this year have been minimal — about 0.026% of total outstanding municipal debt — and state-tax revenues rebounded an average of 9% in the first quarter of 2011. Many governors are cutting spending by pushing unions to accept contracts with ­multiyear wage freezes. Moreover, munis are cheap relative to US Treasuries now, and their yields can be much better after considering taxes. (Municipal bond interest is exempt from federal and possibly state and local tax depending on where you live, while Treasuries are exempt from state and local tax.) The recent average yield on 10-year AAA-rated municipal bonds is 2.1%. For a 10-year Treasury, the yield is about 2%. Recommended: iShares S&P National AMT-Free Municipal Bond ETF (MUB) is the largest muni bond ETF. More than 90% of its bonds are rated A or higher, with maturities ranging from one to 25 or more years. It has gained 10.2% in 2011.* Recent yield:3.5%.

Russ Koesterich, CFA, is managing director and chief investment strategist of the San Francisco–based iShares division of BlackRock, an asset-management firm with more than $3.5 trillion in assets. He is author of The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now (McGraw-Hill).

Invest with a proven intermediate-bond fund manager. The current environment calls for a nimble bond fund manager who has proved his skills in the face of many varied challenges and is great at balancing risks with the potential for higher rewards. My favorite fund now: Doubleline Total Return Fund (DLTNX) is an intermediate-term bond fund whose recent annual yield was 8.3% — among the highest in the category. This was achieved by mixing risky and conservative investments, including more than 60% of its assets held in AAA-rated bonds. It gained 11.3% over the past year as of August 31, putting it in the top 1% of its category. Although the fund is new, it is run by Jeffrey Gundlach, one of the most talented bond fund managers anywhere, who had a stellar record for 16 years at TCW Total Return Bond. (He was ousted from TCW in December 2009 over a dispute with management.) www.DoubleLineFunds.com.

Robert M. Brinker is editor of Brinker Fixed Income Advisor, a monthly investment letter covering Treasuries, municipal bonds and no-load bond funds, Littleton, Colorado. www.BrinkerAdvisor.com


Look into a 15-year mortgage.Many home owners who are refinancing have been abandoning traditional 30-year fixed-rate loans for shorter-term loans. Of course, a shorter-term loan requires a higher monthly payment, but interest rates on 15-year loans are so low — recently averaging 3.5% versus 4.3% for a 30-year mortgage — that these payments can be surprisingly affordable, allowing you to pay off your mortgage faster and save tens of thousands of dollars over the long run. For example, someone with $200,000 left on a 30-year mortgage who refinances to a 15-year mortgage may see monthly payments go up by just $100 to $150. The strategy is especially attractive at this time when there are few attractive options for investing any extra money that would be saved in monthly payments by choosing a 30-year mortgage.

Keith Gumbinger is vice president of HSH Associates, the nation’s largest publisher of mortgage and consumer loan information, Pompton Plains, New Jersey. www.HSH.com

Abstract credit cards

Grab lower interest rates on credit cards.

With the Fed pledging low short-term interest rates for many months to come and with a drop in the rate of delinquencies on credit card payments, expect to see credit card issuers compete more aggressively by offering lower interest rates. This could help you if you must maintain a credit card balance. Recommended no-fee cards: Chase Freedom Credit Card (800-432-3117, www.Chase.com) offers a 0% introductory rate for 12 months on balance transfers and six months on purchases, with a variable rate as low as 11.99% after the introductory period, plus a $100 cash-back bonus if you spend $500 in the first three months… Capital One Platinum Prestige Credit Card (800-955-7070, www.CapitalOne.com) offers a 0% introductory rate on balance transfers and purchases until November 2012, with a variable rate as low as 10.9% afterward.

Ben Woolsey is director of marketing and consumer research, CreditCards.com, Austin, Texas.

Expect more 0% to 1.9% financing on new-car loans in the next several months even from manufacturers such as Toyota that have rarely offered these kinds of deals in the past. Rates are typically based on a tiered structure, such as 0% for up to 36 months… 0.9% for 48 months… and 1.9% for 60 months.

Jesse Toprak is vice president of industry trends at TrueCar.com, which tracks new-car pricing and trends, Santa Monica, California.

Don’t rush to lock in airfares right away.The cost of airline travel may very well drop in coming months, thanks to lower fuel prices and ­sagging demand from worried consumers scaling back in case of another recession. Look for the biggest bargains to certain places in the US (such as Florida and Las Vegas), Mexico and the Caribbean (such as Aruba). Unfortunately, Europe will remain very expensive because fuel surcharges have more than doubled in the past four years.

Tom Parsons is cofounder and CEO of BestFares.com, Arlington, Texas.

*Investment returns on all ETFs and mutual funds are through August 31, 2011.

Related Articles