Earlier this month, the Federal Reserve cut the interest rate to 0% in an effort to try and limit the economic impact of the coronavirus outbreak. From a macroeconomic perspective, this decision has a direct impact on the lending environment and how the U.S. economy goes about recovering from this crisis, but it also has an impact on the kinds of investment opportunities Yieldstreet is able to bring to our investor base.
Here, we take deep dive into why the Fed made this decision to cut interest rates to 0%, what it means for the lending environment, and how Yieldstreet is in a unique position to help investors make the most of a market downturn.
Why does the Federal Reserve cut interest rates during times of emergency as they have done in response to the coronavirus crisis?
The coronavirus crisis has plunged the global economy into an unprecedented period of uncertainty. As the United States Government grapples with the immediate impact on public policy, the healthcare system, and the economy, it’s using one of the most powerful tools it has at its disposal, its monetary policy. The Fed has taken several measures to try and soften the blow to the U.S. economy. These include:
As the economy slows and potentially enters a recession, these steps are meant to help reduce the pain of everyday Americans so that they are able to pay the bills as well as to calm the market down. By aggressively cutting the interest rate to 0%, the hope is that the economic downturn will be as short-lived as possible so the economy can recover as soon as possible.
What is the impact of a 0% interest rate environment on lenders?
Once a way forward emerges through the pandemic, the markets can be expected to calm down and a new set of credit spreads will come in. This will establish new rates in the market. The absolute yields in this period will likely be lower than what they were prior to the coronavirus outbreak as the economy will still be in the recovery phase. We anticipate that institutional quality lenders will find it more difficult to find high quality and high yield investments to lend to in this time period, but will likely gain access to cheaper paper due to lower rates. This will mean that fixed-income investments will appear less attractive than they did in the past.
This period will also mark a time where some interesting distressed opportunities with attractive yields may emerge. Historically, whenever investors start buying-in during scenarios like these, they have the potential to make money, irrespective of whether they operate in the equity market or credit market.
There will also be dislocations in corporations that have seen a lot of selling-off of their stocks, which investors could potentially look into to find good returns.
We anticipate that investors will start looking to alternative assets for better yields. When it comes to alternative investments, it will also take some time for things to recover but we expect that there will be some interesting dislocations where risk and reward could be better than before the coronavirus outbreak.
What is the impact of a 0% interest rate environment on borrowers?
Borrowers with access to the market will have the opportunity to refinance their debts. Homeowners will also be able to refinance their mortgages.
What will this mean for Yieldstreet and its offerings?
If you are an accredited investor, you may find it challenging to decide where to invest. In the current scenario, stocks and bonds may appear to be unattractive investments and, unless you are able to tap into private investments and act quickly on your own, you stand to miss out on a number of opportunities of interest.
During the prior recessionary cycle in 2008, many hedge funds made money through alternative asset classes and private credit because they had access to assets that were not available to individual investors. This is because the Jobs Act, which eased regulation around crowdfunding, had not yet been implemented.
This time around, individual investors will have access and be able to participate in such opportunities through alternative investment platforms like Yieldstreet. In our view, this is unprecedented and exciting. The Yieldstreet business model is optimized for times like this. As we do not have a fund for deploying capital, we are not sitting with any marked-down positions.
Now that there has been a disruption in the equity and credit markets, we believe we can opportunistically find attractive investments for our investor base. We are already starting to see opportunities that are looking attractive at these levels. Additionally, in times where there is a ‘credit crunch’ or lack of liquidity in the market, we’re also able to work with higher quality borrowers and be able to charge a higher premium.
What will this mean for Yieldstreet investors?
A good metaphor for investing in times like this would be learning how to drive. When you first learn to drive, you start slowly, but eventually, as you become more comfortable, you can make better calls about how you drive in various circumstances.
Similarly, when thinking about investing in the current environment, we would recommend that investors start small and slow. As markets cannot be timed, it’s not really a good idea to stop investing entirely, but investors should not overextend themselves in times of uncertainty such as these. As the dislocation in the market reveals potentially attractive investments, Yieldstreet will look to offer them on the platform. By investing regularly across multiple asset classes and not going all-in on any single offering, investors could diversify their portfolio with some interesting alternative assets and be in a better position once the market recovers.
How does the current crisis compare with what happened in 2008?
The main distinction we’re seeing now is that businesses are shutting down due to the lockdown needed to prevent the spread of the virus. In 2008, the flow of money was not disrupted as it is in the current scenario. While money will continue to flow within the economy, for it to function normally, it must do so at a fast enough pace to create GDP growth. Even though the Fed is doing everything it can to pump money into the economy, it’s still not flowing fast enough. As much of the world is still rooted offline, without the day-to-day activities that constitute a stable economy, it is still uncertain what the full impact of this outbreak will be. Additionally, the concern that the disease could re-emerge is also a factor that makes this situation different from the economic crisis of 2008.
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