Be prepared: Rates will rise again
The rate hikes are coming! The rate hikes are coming! Eventually.
Days after the Federal Reserve seemed to sound the alarm that the era of near-zero interest rates is ending, Chairman Ben Bernanke tempered those expectations a bit this week. Just because the Fed boosted the rate it charges banks, he told Congress, doesn’t mean it will move any time soon to boost broader interest rates too.
Nonetheless, it behooves investors to be ready, regardless whether rate hikes come in the second half of 2010 or next year.
Despite what some may think, moving toward higher rates will be good news in many ways. It’s an endorsement of the economy’s potential to stand on its own. It means yields from CDs as well as savings and money-market accounts at banks won’t be minuscule much longer. It could even bode well for certain types of stocks.
But higher rates are bad for bonds and may make some other holdings less appealing too. So investors should take a close look at what they own.
"It’s a wakeup call," says Larry Glazer, partner at Mayflower Advisors in Boston quick cash.
Here’s how rate hikes could affect you:
Bonds — Bonds are in line to experience the biggest fallout, because they generally move inversely to rates. When rates exceed the rate on a previously issued bond, the bond’s value on the open market drops.
Stocks — Overall market returns may be harder to come when the Fed determines it needs to raise rates to try to keep the economy from growing too fast. But stocks should still climb. Tread carefully, though. Some sectors — notably utilities, financials and materials — have been big laggards when rates rise.
Saving and borrowing — Long-suffering savers can look forward to their money growing at a decent clip again while sitting in the bank. At the same time, rising rates will make mortgages and other loans more expensive. If you’re thinking about buying a house or refinancing a current mortgage, it might be time to consider locking in those low-low rates.