For many years, interest rates have been relatively low. The bond market is proof that there has been talking of interest rates rising.
What should you do with your money?
The next section of the investment portfolio is the fixed income section. In the world of investing, certain investments will be impacted more than others. Which interest rate is rising first should be considered. There are rates for deposits made for one day, one week, six weeks, one year, and so on, all the way up to 30 years. The overnight lending rate will be announced by the Bank of Canada or the U.S. Federal Reserve, but the other rates will depend on the markets in which they trade. On occasion, the longer term rates may vary regardless of how the bond market interprets the direction of interest rates in Bend, even while the overnight rates may not. This recently occurred as the price of a US 10-year bond increased while the overnight rates remained unchanged. A change in rates would have an impact on you if you have fixed income investments, such as bonds, mortgages, or any other sort of loan where you are getting the interest rather than paying it.Because the interest rate determines the “price” of your investment, a rise in the rate would result in a decrease in the price of the debt security. This means that it is less expensive to earn the same interest as it was when interest rates were lower. The prices will fluctuate as you retain this investment until it matures, but since you are holding the specific bond, you won’t be impacted. You cannot anticipate that you will receive a particular sum of money at a maturity date if you are holding a pool of bonds or mortgages, similar to a mutual fund, because the securities would change over time.You could or might not be impacted depending on whatever interest rate is rising. If the interest rate on the 10-year Treasury bond increases while you are the bond’s holder, you would be immediately impacted. This security would not be affected if you also possess a 30-day US Treasury Bill, unless the 30-day rate has also increased.Regarding the equities section of the investment portfolio, interest rates typically have an impact on stocks, albeit the effect varies based on the type of company. It should be noted that higher rates generally drain more money from consumers’ pockets, slowing economic growth under normal circumstances. This is equivalent to saying that not all ships are affected equally by a falling tide.When interest rates rise, the equity markets generally tend to decline, but not all stocks are affected in the same manner. The stock price will react to a change in interest rates more strongly the more debt and interest rates affect the company.A highly leveraged industry, such as a hedge fund, would find borrowing more expensive, which would restrict the capacity to increase borrowing-related profits. When interest rates rise, home builders and auto manufacturers typically see a decline in sales as a result of increased consumer costs for homes and vehicles. It will also cost extra to keep a car or a house if you already have them. The same pattern frequently appears in sectors that depend on homes and automobiles, such as furnishings, appliances, major electronics manufacturers, renovations, and so forth. These stocks would have a significant impact if the industry, such as potentially food, utilities, water, or businesses with fixed costs that are paid in advance, was not impacted by interest rates.There are also some companies that are exempt from rate increases; these include those that produce alcohol, tobacco, essential foods, utilities, or gambling. Businesses that prosper that counteract the economic slowdown when the economy worsens, which typically occurs when interest rates rise.What about property? Because borrowing is frequently involved in purchasing and maintaining real estate, as was said above, higher interest rates will typically result in real estate being more expensive. Because the relationship is not always direct or immediate, interest rates may increase temporarily before having any impact on real estate prices. Because the real estate market is less liquid than the equity or bond markets and because real estate transactions are typically quite expensive for most people, people take longer to complete them. Rental properties, apartment complexes, foreign real estate in locations where interest rates are not in effect, senior housing, healthcare facilities, and government-owned real estate might be exceptions.
