Tahoe-Truckee Market Beat: Keep an eye out for rising interest rates
June 16, 2015
Most investors expect the Fed to start raising interest rates this year. A lot of forecasters are looking to the September meeting for the first rate increase.
The Fed controls the Fed funds rate. Other interest rates are driven by market forces, and the buying and selling of fixed income instruments.
Interest rates have already been rising this year. The yield on the benchmark 10-year US Treasury bond hit a 52-week low in February at 1.64 percent and has been rising since then. Currently, it is yielding about 2.4 percent.
When interest rates rise, bond prices fall, so if you have bond holdings in your portfolio, you should be prepared for rising rates, and you could see some volatility in your bonds.
We don't know for sure when the Fed will start raising rates or how high they will go. It is possible that they will raise rates somewhat, but that they will stay relatively low for an extended period of time.
Another possibility is that we will see a flattening of the yield curve when rates do rise. That means that short-term rates will increase, but the longer-term rates, like on the 30-year US Treasury bond, will not increase as much.
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Historically, stocks have performed pretty well in rising interest rate environments.
According to an article in Market Watch, Robert Doll and Scott Tonneson did a study that goes back to the early 1980s. They found that stocks performed well prior to a rate hike, sold off somewhat in the early stages of the rate hike, then performed well in the two years following an increase.
The average sell off after a rate increase was about 10 percent over the six-rate increase they studied. The average gain two years later was 14.4 percent.
The Fed looks at a variety of economic data to determine when to begin the tightening cycle — they look at the labor market, inflation and other areas to make their determination.
When they do start raising rates, it's normal to see some volatility in stocks and bonds.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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