Category: Interest Rates
Low Interest Rates Strategy Tips
In the last year, low interest rates have become the norm as the Fed has used them to combat the economic effects of the Coronavirus. This can make it challenging for investments like CDs, your savings accounts – even high yield accounts – to make enough to outpace inflation. That means that your money is essentially becoming less valuable over time, which gives you less buying power. Let’s talk about some strategies you can use in a low interest rate environment. Bonds are really the classic vehicle for generating income. On the downside, they will fluctuate with interest rate moves and have default risk. But they can generate income and serve as a ballast in a portfolio when equity values are volatile. Individual bonds may be difficult to buy, but bond mutual funds and ETFs can offer diversity and make the process easier and more cost efficient. One of the things that you can do is to create a bond ladder – so you’re investing in bonds that mature at different times or over a certain period. And, as these mature, you reinvest them in a new bond. That way you are constantly earning a return higher than what you may find at most banks and as interest rates change, you are taking advantage of the latest and hopefully highest rates available. Another option is Treasury Inflation-Protected Securities, often known as
Don't Let Your Bonds Suffer as Interest Rates Rise
After the most recent interest rate increase in mid-Mach, The Federal Reserve has signaled that it is likely to continue raising interest rates both this year and next. Bond investors have been concerned about this for years, but this time it looks like it’s going to happen. That may have you wondering – how do I manage my bond portfolio in the face of rising interest rates? Generally speaking, bond yields go down as interest rates increase. But remember, while bonds may decline in value, their moves tend to be smaller compared to other securities. Many investors are flooding into U.S. Treasury bonds, making the so-called flight to quality, because right now, the U.S. looks better than other economies worldwide. This means that medium and longer-term bonds – whose rates are often more influenced by investor expectations than anything else – are likely to be most affected. But, there are many strategies you can use to manage your bond portfolio in a rising interest rate environment. 1. For Treasury inflation-protected securities, or TIPS, the Treasury Department uses the Consumer Price Index to adjust the principal for inflation (or deflation) twice a year. At maturity, the investor gets either the inflation-adjusted principal or the original principal, whichever is higher. 2. Another second smart strategy is to invest in single corporate bonds. You can structure this based on incom
What the Fed rate increase may mean to you
Unless you’ve been sound asleep, you are aware that this past week the Fed increased the federal funds rate for the first time since 2006 to a range of .25% to .50%, and most major domestic banks raised their prime lending rate from 3.25% to 3.50%. While this increase may seem tiny, and may not affect you at the moment, the real question is what does this rate height mean to you over the longer term? First of all, you need to understand higher interest rates are actually good news. The Federal Government believes the worst financial crisis in America since the Great Depression is over. Secondly, we can expect that interest rates will continue to rise over the next several years. How much, and how often is anybody’s guess. Third, rate rises will be a two-edged sword. Interest on saving should grow, but so will debt like credit cards and mortgage rates. Fourth, everybody’s situation is different, so the rate increase is like an early warning to review your financial situation with a qualified professional. When it comes to your money, better to be prepared, than
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