Positioned for Rising Interest Rates?

 

By Jon Flynn

 

Like a doctor performing an emergency balloon angioplasty on a heart attack patient, the Federal Reserve along with the Treasury Department, acted quickly and with extraordinary measures to save our economy from near failure last autumn.  They hooked up the economy with an oxygen mask, and an I.V. and started prepping for surgery.  Soon after, we saw the list of alphabet soup programs roll out like the TALF, the CFPP, and lest we not forget the infamous TARP program.    Scary times, remember? Next, of course the Fed’s old standby of dropping the Fed Funds rate like rock occurred.

 

The target Fed Funds rate now stands at 0.00 to .25%.   My guess is that the Fed will hold this for a while longer until they think the patient is ready to be released from the hospital. However, as the economy recovers, the Fed will want to reverse what they’ve done, and start moving rates back up again. Interest rates being too low, for too long, can have their own set of risks.

 

So if interest rates start to rise, will your portfolio be positioned? Here are some things to watch out for, as well as consider:

 

Bond Prices - Bond prices have an inverse relationship to interest rates.  In general, when interest rates rise, the price of bonds will fall and vice versa.  After all, who would want your old bond that’s paying a low rate, when they can get a new bond for a much higher rate?  The longer the bond’s maturity, generally speaking, the more sensitive that bond is to interest rate increases. So you might want to consider keeping your portfolio positioned in bonds with shorter term maturities.  Laddering your bonds over varying maturities can also be an effective strategy.

 

Stock Prices – Stock prices can offer mixed results in a rising interest rate environment.  For example companies that carry a huge debt load will experience higher expenses if the cost of borrowing money rises, thus profitability and growth forecast shrink.  On the other hand, the Fed is often raising rates in an attempt to cool off a hot economy.  Some companies will really benefit from the increased demand for product and services in a hot company, which can in turn be a boost to earnings. Review your portfolio to see which companies you own are best positioned.

 

Alternative Investments – Increasing interest rates is mainly about controlling inflation and keeping the economy from growing too fast.  Coming off a cyclical low from a recessionary environment, supplies usually are low and demand for them is accelerating.  This will often translate into higher prices for agricultural products and metals.  Adding a small portion of your portfolio to commodities might be a good hedge to consider.

 

Of course, if the economy relapses, the Fed will likely keep any rate increases on hold, but just in case our patient “the economy” is out of the hospital and ready for a marathon, it’s important to start getting your portfolio prepared.

 

All investments involve the risk of potential investment losses. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. The investor may receive less than the original invested amount and is advised to consider the investment objective and risks before investing.

 

 

Jon Flynn is a Certified Financial Planner ^TM and owner of Flynn Financial in Eynon. He is a Representative of Securities America, Inc., Member FINRA/SIPC and of Securities America Advisors, Inc. Flynn Financial and Securities America are unaffiliated.   Mr. Flynn can be reached at 570-876-5015.  Everybody’s situation is different and arriving at solutions can get complicated.  So always consult with financial, legal, and tax professionals before making any decisions.