Author Topic: US. FED may raise interest rates  (Read 2585 times)

Yokan

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US. FED may raise interest rates
« on: March 16, 2015, 12:01:10 PM »
Can anyone with more investing experience comment on how a rising interest rate environment will impact various investments?

I imagine Real Estate will suffer since the monthly mortgage payment for consumers will go up. I'm also guessing that equities for highly leveraged companies will suffer reduced profitability from increased borrowing costs. Bond funds and long term bonds will probably be heavily hit as well, since newer bonds will have higher rates than older bonds.

Is this assessment too simplified? Should I reduce my exposure to these asset classes? I currently have nothing in bonds, but I do have rental properties and a couple of index funds.

Thanks,
« Last Edit: March 16, 2015, 12:04:03 PM by Yokan »

Bob W

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Re: US. FED may raise interest rates
« Reply #1 on: March 16, 2015, 12:27:12 PM »
Seems like the FED has indicated raising interest rates for several years now but never gets around to it.  The problem is that most of the world is still in an economic slump,  CPI is not rising sharply and real unemployment/underemployment remains very high.   Gas prices are low and about to trend lower. As we approach the thick of campaign season this summer it seems unlikely that the FED would want to rock the boat.     

The Fed's duel mission (if you believe it) is to keep inflation low and keep unemployment low.   It has failed in this mission since inception. 

Of course there is nowhere for interest rates to go but up it would appear,  unless we go towards some of the areas of Europe where interest rates are now apparently in the negative.

 

Kaspian

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Re: US. FED may raise interest rates
« Reply #2 on: March 16, 2015, 02:09:49 PM »

I imagine Real Estate will suffer since the monthly mortgage payment for consumers will go up. I'm also guessing that equities for highly leveraged companies will suffer reduced profitability from increased borrowing costs. Bond funds and long term bonds will probably be heavily hit as well, since newer bonds will have higher rates than older bonds.


Your assessment seems pretty dead-on.  But if you notice the words I bolded, it's conjecture.  I highly suggest you don't believe anyone who tells you they know exactly what will happen.  Bond yields should go up while their prices go down a little, real estate should calm because borrowing is more difficult, and the US dollar should rise even more against world currencies.  Whole lotta "should"s, but that doesn't mean any of those markets will behave as predicted.   :)

It also doesn't mean that there wouldn't be a mad broad market and bond sell-off, everything tanks across the board, the US dollar sinks, and for some reason real estate and gold rises.  Doomsayers and TV personalities will tell you that scenario.  That's what they said would happen during the fiscal cliff thing in 2013.  ...And last October when the fed slowly stopped all the fiscal stimulus.  Meanwhile my bonds are up in value as are my equities.   :/

seattlecyclone

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Re: US. FED may raise interest rates
« Reply #3 on: March 16, 2015, 02:41:27 PM »
Yes, the Fed may raise interest rates. They also may decide not to raise interest rates. What evidence do you have that the market has not yet adequately priced in the likelihood of both of these possible scenarios?

Indexer

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Re: US. FED may raise interest rates
« Reply #4 on: March 16, 2015, 03:55:48 PM »
The fed may raise rates.  Keep in mind they originally called for the end of QE3 back in 2013 and people freaked out assuming rates would skyrocket.  They didn't... rates were actually down in 2014, and are still below their 2013 peak(looking at 10 yr treasury yields).

So its all guessisms.  Plus they are starting QE in Europe so who knows how that will affect things.

Effect on investments. 
Bonds:  This is pretty easy to measure since bond prices move inversely with interest rates in a predictable manner(at least more predictable than stocks).  Look at the duration on a bond fund.  If rates go up 1% expect the bond's value to drop by about 1X the duration.  So if the duration is 5 and rates go up by 1%, the bond fund's value should drop by about 5% all other things being equal(which they never are).   Don't use this as an excuse to abandon bonds.  1.  we don't know what rates will do.  2.  if you own the bond fund for a longer period of time than the duration(so if the duration was 5 you own it more than 5 years) rising interest rates should actually HELP you.  When you own bonds you want higher yields.  When rates rise it hurts existing bonds, but as a bond fund swaps out maturing bonds for new bonds at higher rates the bond fund pays more in the long run.  If you plan on owning bonds for 10 years or more the best thing that could happen for you long term returns is a rate increase.  3. bonds are still safer than stocks so if your asset allocation calls for bonds... keep bonds in the portfolio.

Real estate probably will suffer some given that new mortgages will be more expensive and no one will be refinancing with higher rates.

Stocks:  in the short term, probably some volatility.  Over the long term probably not much of an effect.  My biggest concern in this environment has been how many people in desperate search of yield have went from CDs/bonds to more risky stocks.  If CDs suddenly pay something again they will probably move back to CDs.

Now... this is all theory, and in the real world rates will probably raise very very slowly. Bonds are very sensitive to interest rate changes so they will move inversely to how rates increase.  Small increase = small drop in bond prices.  Real estate will depend on how healthy the housing market is.  If people are moving to the area and there is a lot of demand then a small rise in interest rates probably won't have an effect.  If people can barely afford to live in a given area as it is and there isn't a huge amount of demand new housing sales might start to suffer with even a small increase in mortgage rates.  Stocks as always are the hardest to predict.  If earnings remain strong and rates remain low enough that there is still a clear risk premium for owning stocks instead of cash/bonds then you probably won't have to worry too much.  If the risk premium starts to disappear and earnings aren't strong(which could also happen if the fed raises rates to fast) then stocks could take a hit.


Lots of information.... the most important thing I said was, "Now... this is all theory, and in the real world rates will probably raise very very slowly."