Interest Rates Rising

Interest Rates Rising

As discussed in our last client letter, this year has seen a rise in longer-term interest rates. In March, long-term interest rates rose again by 0.28%. After starting the year around 0.9%, the yield on the U.S. 10-year Treasury note has now nearly doubled to 1.73%. This leaves the overall U.S. bond market down by 1.3% for the month. If you are investing in bonds over the long-term, the rise in interest rates comes with an advantage: as bonds make their interest payments, those interest payments are invested at new, higher rates.

In the stock market, these higher yields had previously given equity investors pause, and led to choppy stock trading. Not so in March, as the U.S. stock market produced new gains. It is unclear how long this relationship can hold. Should bonds keep increasing in yield, they will eventually become attractive enough for some equity investors to turn their backs on overvalued stocks. For now, however, it appears that equity investors are expecting rapid short-term corporate profit growth. One potential path to such profit growth would be a defeat of the pandemic combined with further fiscal stimulus.

Speaking of which, on the final day of March, President Biden unveiled his two trillion-dollar infrastructure plan. This plan includes funding for items such as roads, bridges, mass transit, Amtrak repairs, electric vehicle chargers, replacing lead water pipes, expanding broadband internet access, electrical grid upgrades, and energy efficient housing. The plan also includes funding for domestic manufacturing, research & development, public schools, and elderly care. The proposal is actually “Part One” of a broader agenda, with an expected “Part Two” focusing on healthcare and education.

To offset such spending, the plan calls for raising the corporate tax rate from 21% to 28%, and claims this would cover the cost of the plan over 15 years. While this increase is likely to hit corporate bottom lines, it is important to remember a rate of 28% would still be below the 35% rate that was in place for decades prior to 2018. Also, the effective tax rate that is actually paid on corporate profits tends to be significantly lower than the headline tax rate. The plan doesn’t include any changes to individual taxation, though income tax rate increases and other novel approaches have been floated by various members of Congress.

Regarding individual taxation, the IRS announced that the federal income tax filing due date for individuals for the 2020 tax year was extended to May 17, 2021, as was the deadline for IRA contributions. Most Schwab tax documents are now available. If you would like assistance obtaining your documents, or if there is anything else we can help you with, please let us know. We are here for you.

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