How Rising Interest Rates Will Affect You and Your Investments
March 29, 2022 | Sage Capone
As we have all seen in the last month, the government is slowly edging up interest rates. What will this mean for you and your savings accounts or investment portfolio? What has been seen in past decades is when rates increase financial markets often move in response but not simultaneously. Here are some facts and historical trends to look out for moving forward.
In the past, bank and investment holdings have favored positively when federal funds rate increases. In turn this allows bank savings rates rise which gradually benefit the account owner. Bank stocks follow suit as the higher interest rates charged on deposits and loans will yield you a higher return. Short-term Bonds and CDs favor differently in this regard. Short-term bond prices may initially drop but begin to move slowly into higher yielding securities which boost in income over time. However, short-term CD rates rise but sparingly.
The uncertainty of rate hikes can be unpredictable when it comes to lending and stock market evaluations. Although rate increases are meant to curb inflation, U.S. stock markets tend to underperform and lag during fast rate hikes. Long-term and intermediate bonds prove to have a mixed performance as bond yields rise pulling their prices lower. In most cases, gains are most affected by inflation verse federal funds rate increases. When it comes to lending, stick with fixed mortgages as they track 10-year Treasury yields and won’t be affected by higher mortgage rates. Same goes for asset-based loans as they’re still the safest and most effective way to borrow in avoiding financial risk.
The most negative impact of rate hikes will be for the average borrower and investor. Here you will see a short-term rate increase on equity loans and auto loans. This is where you’ll need to look for better incentives from financial institutions or dealerships to ease the pain of borrowing. Adjustable-rate mortgages will feel the highest pinch with rate increases. And last of all, utility stocks tend to underperform so look for higher-yielding fixed-income investments instead.
So, what does this all mean for the average investor? You will not see a huge gains in your savings accounts with only a quarter of a percentage point increase. However, higher yields will be seen in the fixed income space based on the movement of the yield curve. Therefore, staying ahead of the market and establishing a diversified financial portfolio based on your goals and risk during changing markets is your best protection. While history can be used as a guide there is no proven rule when it comes to investing. Knowledge is power and reaction is your best advice.