What's happening with interest rates? I'm hearing this question daily, whether meeting with clients, waiting in line at the deli, or chasing my 21-month old daughter down the street while she runs as fast as her little legs will take her. Below you'll find some of the more common questions I'm hearing, answers included!
Q: When are interest rates going to go up? A: Great question! It could happen six weeks, six months, or a year from now. Depending on who you ask, the time frame is different. There's this opinion, this one, and this one too - the truth is, nobody actually knows, and the Federal Reserve continues to give vague statements about the outlook for interest rates. Here's what we know to be sure - interest rates have been historically low for a long period of time, and at some point in time they will go up. Nobody, with any certainty, can predict exactly when this is going to happen - but at some point - it will.
Q: What is likely to happen when interest rates do rise? A: Prices of bonds and other fixed income securities are likely to fall. Think of it like this - if I have a bond paying 3% and all of a sudden interest rates rise and you have a bond that will pay 5%, who has the better bond? You do, and the demand for mine (price) will drop. If you own bonds and plan to hold them until they mature, the impact on your portfolio is likely to be less than if you own mutual funds of bonds in something like your 401(k). You'll find a more detailed piece here talking about the impact of rising interest rates on your 401(k) and bonds.
Q: So bonds and bond funds will see a decline in price. Who benefits from a rise in interest rates? A: Typically, banks have done well in times of rising interest rates, and that could potentially happen when rates begin to rise this time. Banks generate large portions of their profits from the interest they collect on loans, and rising rates mean they can charge more for mortgages, lines of credit and the like. In theory, profit margins should grow and banks should benefit - they have in the past. It should also mean higher rates of return on CDs, but let's not hold our breath!
Q: What should I be doing now? A: Check with your advisor - ask if they see any potential road bumps along the way. Perhaps there are some adjustments you could make to potentially better position your investments. I've been calling mine to have this very conversation and discuss our strategies to be ready as best we can. If you'd like a phone call, let me know - happy to begin the conversation.
Chuck Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).