3 Reasons to Rejoice Higher Interest Rates

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Rick Ferri
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3 Reasons to Rejoice Higher Interest Rates

Post by Rick Ferri »

Interest rates are going up. The Federal Reserve has essentially said so. They just haven’t said exactly when or by how much. Are you afraid of higher interest rates? If so, what you fear is probably the potential bad side. While they may have a dampening effect, there also are some silver linings to be found. I mention three in my latest blog, 3 Reasons to Rejoice Higher Interest Rates

1. A Great Anxiety Is Lifted
2. Many Investors Will Earn More Money
3. The Fed Gets Its Hammer Back

Yes, odds are high that interest rates – at least short-term rates – are going up. If you feel anxiety about this, think of the good news that higher rates can bring. There are benefits to interest rate increases, even if not enough of us in the financial press are talking about them.

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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by cfs »

Thanks.

Thanks Rick Ferri for another good article. Keep them coming.

And now it is time for my LUng distance workout, thanks again.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by denovo »

When interest rates go up, the net result should put more money in the pockets of these investors. That’s a good thing. Interest rates on Certificates of Deposit and new bond fund investments go up, and the total return on bond funds held in long-term saving accounts should eventually increase too.

All I care about is real return. I'd rather have a 1 yr CD paying 1 percent when inflation is 0 than a 3 percent CD when inflation is 3 percent.

https://en.wikipedia.org/wiki/Money_illusion
n economics, money illusion, or price illusion, refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value) at a previous point in the general price level (in the past).
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Rick Ferri »

Obviously. Real rates have been below average for a long time. I assume in the article that real rates go back to the average.

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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Abe »

I've been sitting on the sideline with about 2.8 million in cash investments all this time (about 10 years) only getting about 1% or less. :oops: Looking back, I know there are a lot of things I could have done better with this money, but I didn't. After waiting this long, I don't see much point in putting it in bonds now. Even if I only get 3%, that's 84k a year. I got 7% with one year CD's for a long time before they went to nothing. Now 3% sounds good.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Tanelorn »

Rick Ferri wrote:Real rates have been below zero for a long time. I assume in the article that real rates go back to the average.
Fixed that for you :(
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by nisiprius »

Tanelorn wrote:
Rick Ferri wrote:Real rates have been below zero for a long time. I assume in the article that real rates go back to the average.
Fixed that for you :(
Not for intermediate-term-or-longer TIPS owners and not for I bond owners.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by matjen »

Nice article Rick. Thanks for posting. I'm all for a gradual an moderate increase in rates! :moneybag
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Buddtholomew »

I would include a comment on reinvesting interest payments and taxes. These factors determine number of years required to recover losses in the event of a rate increase.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Rick Ferri »

Buddtholomew wrote:I would include a comment on reinvesting interest payments and taxes. These factors determine number of years required to recover losses in the event of a rate increase.
That's true. If there is higher inflation, then taxes and inflation together can actually create lower real after-tax returns. It would take a book to list all the possible scenarios. I stopped writing after 1,000 words.

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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Uncle Pennybags »

I noticed the higher rates, they jumped out at me in my money market fund. I used to get 1¢ per month per $1,000. That has shot up to 3¢ a month and it looks like 4¢ next month; that will be 12¢

Let the good times roll.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by denovo »

Uncle Pennybags wrote:I noticed the higher rates, they jumped out at me in my money market fund. I used to get 1¢ per month per $1,000. That has shot up to 3¢ a month and it looks like 4¢ next month; that will be 12¢

Let the good times roll.
A few more cents there and you can treat yourself to a pack of gum.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Abe »

Uncle Pennybags wrote:I noticed the higher rates, they jumped out at me in my money market fund. I used to get 1¢ per month per $1,000. That has shot up to 3¢ a month and it looks like 4¢ next month; that will be 12¢

Let the good times roll.
I'm waiting on 12 cents. That's 1100% increase.
Slow and steady wins the race.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Tanelorn »

nisiprius wrote:
Tanelorn wrote:
Rick Ferri wrote:Real rates have been below zero for a long time. I assume in the article that real rates go back to the average.
Fixed that for you :(
Not for intermediate-term-or-longer TIPS owners and not for I bond owners.
For TIPS, a 10 year lockup gets less than 0.5% while you get just a touch over 1% for 30 years (before taxes, which I understand may be due along the way on phantom gains). A far cry from when banks paid 5-6% and inflation was half that.

http://www.treasury.gov/resource-center ... =realyield
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by joe8d »

Yea!!!! :sharebeer
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by bhsince87 »

Folks with long term, fixed rate mortgages should rejoice!
Time is what we want most, but what we use worst. William Penn
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by abuss368 »

Hi Rick,

Good article! Does this mean I will start to receive interest income on savings!!! Ha ha! Bond income should increase too and that will help retired folks.

Best.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Uncle Pennybags »

Abe wrote:
Uncle Pennybags wrote:I noticed the higher rates, they jumped out at me in my money market fund. I used to get 1¢ per month per $1,000. That has shot up to 3¢ a month and it looks like 4¢ next month; that will be 12¢

Let the good times roll.
I'm waiting on 12 cents. That's 1100% increase.
That 12¢ is for the entire $3,000 I keep in the fund.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by GoldenFinch »

Uncle Pennybags wrote:
Abe wrote:
Uncle Pennybags wrote:I noticed the higher rates, they jumped out at me in my money market fund. I used to get 1¢ per month per $1,000. That has shot up to 3¢ a month and it looks like 4¢ next month; that will be 12¢

Let the good times roll.
I'm waiting on 12 cents. That's 1100% increase.
That 12¢ is for the entire $3,000 I keep in the fund.
I guess they don't call you Uncle Pennybags for nothing.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by stemikger »

Thanks Rick. I found this very helpful.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by nisiprius »

A strange thing to me is that dividend stocks get so much love while bonds get so much hate, even though everything that's true about dividend stocks (compared to non-dividend-payers) is truer for bonds, and many things that are half-true for dividend stocks are simply true--or very nearly so--about bonds.

For example, there's a saying
"Milk from the cow, eggs from the hens,
And stock, by God, for the dividends."

Well, in the case of bonds it better be "for the interest" because there isn't any capital appreciation over the life of the bond. (OK, there might be a grand total of 0.5% over the life of the bond if it's bought at a discount, but you know). There is no reason for a long-term investor to buy a bond except for the interest payment. Certainly if you buy and sell rather than holding to maturity there are price fluctuations which officially count as capital appreciation AND depreciation, but they cancel out over the life of the bonds.

If the only reason for buying bonds is the interest, then it seems dead obvious that the higher interest rates are, the better.

So now we get to "but when interest rates rise, bonds fall." OK, you are new to investing, you hear the interest rates have gone up... and it's a little counterintuitive that it means that your bond's market value falls, so it's legitimate that they hammer home this point in Investing 101. But when you think about it, it's not surprising. The interest rate on your bond didn't go up, only "the" interest rate--the interest rate you can get on new bonds. Nothing bad has happened to your bond, but there are better ones out there, and you shouldn't expect someone to pay full price for your bond when they can get a better one.

It's just as if you buy a 2013 Gadgetmobile and read that next year's model is going to have much better fuel economy. Is that good or bad news generally for Gadgetmobile fans? Good, of course. Is it good for you? Not directly, your car and its fuel economy doesn't change, and the resale value of your gaz-guzzling Gadgetmobile just dropped. Is it a great big hairy deal? Probably not unless you're a speculator in used cars who just bought a bunch of 2013 Gadgetmobiles expecting to turn them around for a quick killing. Meanwhile, your TCO hasn't changed and when it's time to buy a new Gadgetmobile you will be happy that your next one will be a better car than your current one.

Now, fans of stocks like to put a lot of faith in mean reversion, and like to believe that stock has some rock-solid fundamental value to which the price reverts, so that over the long haul you can ignore price fluctuations because any dip is sure to be temporary. This is at best a dubious half-truth for stocks, but barring default it is actually true for bonds. "Volatility doesn't matter if you're patient, if your stocks go down just wait and they'll come up again" isn't even a half-truth; it might be a quarter-truth or an eighth-truth. But for investment-grade bonds, it is true. What goes down must come up and it most come up on schedule. OK, 98%-true for an individual bond (it could default), and, oh, I dunno, if you're invested in a fund with 6-year duration and you plan to hold for 24 years, maybe 75%-true (the idea being that conceptually, if the fund were a collection of bonds held to maturity, about 75% of them would complete their issue-to-maturity life-cycle while 25% of them would be exposed market fluctuation at the time of purchase or sale).

It's widely claimed that dividend stocks suffer less in downturns than stocks in general. And, true, from 12/31/2007 to 3/6/2009, Total Stock dropped 52%; Nicholas Equity Income only dropped 43%. But Total Bond rose 4.5%!

Bonds are not some kind of magic super-asset, and interest rate sensitivity is important, and inflation risk in nominal bonds is extremely important. The thing I just wanted to rant about is that it is curious, as I say, that dividend stocks are touted for characteristics that they only sorta-kinda-partially have, to a limited and unreliable degree--while bonds, which actually possess all of these characteristics to a much higher degree, are widely disliked.
Last edited by nisiprius on Thu Aug 06, 2015 5:50 am, edited 1 time in total.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Call_Me_Op »

bhsince87 wrote:Folks with long term, fixed rate mortgages should rejoice!
Why?
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Call_Me_Op »

Rick,

Why are you assuming that any expected Fed actions are not already factored into interest rates?
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by bondsr4me »

does anyone know of a website that would chart the cummulative account balance making various rate assumptions?

I believe VG does this for stocks; ie, they like to show your cumulative values rather than per/sh price variances.

I would be very interested in seeing a chart that shows the accumulated value of say, starting with $10,000, assuming various rate increases and reinvestment of interest received from the bond fund.

Thanks,

Don
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by stemikger »

nisiprius wrote:A strange thing to me is that dividend stocks get so much love while bonds get so much hate, even though everything that's true about dividend stocks (compared to non-dividend-payers) is truer for bonds, and many things that are half-true for dividend stocks are simply true--or very nearly so--about bonds.

For example, there's a saying
"Milk from the cow, eggs from the hens,
And stock, by God, for the dividends."

Well, in the case of bonds it better be "for the interest" because there isn't any capital appreciation over the life of the bond. (OK, there might be a grand total of 0.5% over the life of the bond if it's bought at a discount, but you know). There is no reason for a long-term investor to buy a bond except for the interest payment. Certainly if you buy and sell rather than holding to maturity there are price fluctuations which officially count as capital appreciation AND depreciation, but they cancel out over the life of the bonds.

If the only reason for buying bonds is the interest, then it seems dead obvious that the higher interest rates are, the better.

So now we get to "but when interest rates rise, bonds fall." OK, you are new to investing, you hear the interest rates have gone up... and it's a little counterintuitive that it means that your bond's market value falls, so it's legitimate that they hammer home this point in Investing 101. But when you think about it, it's not surprising. The interest rate on your bond didn't go up, only "the" interest rate--the interest rate you can get on new bonds. Nothing bad has happened to your bond, but there are better ones out there, and you shouldn't expect someone to pay full price for your bond when they can get a better one.

It's just as if you buy a 2013 Gadgetmobile and read that next year's model is going to have much better fuel economy. Is that good or bad news generally for Gadgetmobile fans? Good, of course. Is it good for you? Not directly, your car and its fuel economy doesn't change, and the resale value of your gaz-guzzling Gadgetmobile just dropped. Is it a great big hairy deal? Probably not unless you're a speculator in used cars who just bought a bunch of 2013 Gadgetmobiles expecting to turn them around for a quick killing. Meanwhile, your TCO hasn't changed and when it's time to buy a new Gadgetmobile you will be happy that your next one will be a better car than your current one.

Now, fans of stocks like to put a lot of faith in mean reversion, and like to believe that stock has some rock-solid fundamental value to which the price reverts, so that over the long haul you can ignore price fluctuations because any dip is sure to be temporary. This is at best a dubious half-truth for stocks, but barring default it is actually true for bonds. "Volatility doesn't matter if you're patient, if your stocks go down just wait and they'll come up again" isn't even a half-truth; it might be a quarter-truth or an eighth-truth. But for investment-grade bonds, it is true. What goes down must come up and it most come up on schedule. OK, 98%-true for an individual bond (it could default), and, oh, I dunno, if you're invested in a fund with 6-year duration and you plan to hold for 24 years, maybe 75%-true (the idea being that conceptually, if the fund were a collection of bonds held to maturity, about 75% of them would complete their issue-to-maturity life-cycle while 25% of them would be exposed market fluctuation at the time of purchase or sale).

It's widely claimed that dividend stocks suffer less in downturns than stocks in general. And, true, from 12/31/2007 to 3/6/2009, Total Stock dropped 52%; Nicholas Equity Income only dropped 43%. But Total Bond rose 4.5%!

Bonds are not some kind of magic super-asset, and interest rate sensitivity is important, and inflation risk in nominal bonds is extremely important. The thing I just wanted to rant about is that it is curious, as I say, that dividend stocks are touted for characteristics that they only sorta-kinda-partially have, to a limited and unreliable degree--while bonds, which actually possess all of these characteristics to a much higher degree, are widely disliked.
Nisprius, I actually understood that which is huge for me when it comes to bonds. Where were you when I went 100% stocks because I thought bonds were as dangerous as stocks. I'll reread this if I ever decide to do that again. :beer
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by GoldenFinch »

Thank you to Nisiprius for the above detailed post. That was the best description of how bonds work that I have read. I can finally say I understand.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by bhsince87 »

Call_Me_Op wrote:
bhsince87 wrote:Folks with long term, fixed rate mortgages should rejoice!
Why?
Assuming they own bonds (which I should have stipulated), their income will increase, but their outflow will remain the same.
Time is what we want most, but what we use worst. William Penn
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by TradingPlaces »

Good point, except that the Fed is so dovish that it will take years to get the Fed Funds rate to any level that will result in meaningful interest.

Anxiety lifted? Are you kidding me? Once the first rate hike comes, a lot more anxiety will be in the air:

- when is the next one,
- how many to come,
- etc.

I am waiting for days when the short term deposit accounts will pay 6%, like in the good old days of 2006/2007.
Last edited by TradingPlaces on Fri Aug 07, 2015 1:04 am, edited 1 time in total.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by TradingPlaces »

Call_Me_Op wrote:
bhsince87 wrote:Folks with long term, fixed rate mortgages should rejoice!
Why?
Because their neighbors are going to get higher rate mortgages, and it is always better to have the lowest rate mortgage on the block.

D'uh.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by naha66 »

Wow going from 0% to 1/4%!
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Call_Me_Op »

bhsince87 wrote:
Call_Me_Op wrote:
bhsince87 wrote:Folks with long term, fixed rate mortgages should rejoice!
Why?
Assuming they own bonds (which I should have stipulated), their income will increase, but their outflow will remain the same.
Even with that stipulation, I do not agree with the conclusion. You are assuming that an increase in the Fed overnight rate will increase the interest payout on their bonds. That is not in any way certain. First, there will be no immediate effect on their income. Second, since all expected Fed actions are already baked into current bond prices (and bond interest rates), you cannot predict how they will respond to Fed rate increases, which are already anticipated (and baked in).
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by TMCD75 »

It would stand to reason that a person with little to no debt would or could do quite well in a higher interest rate environment. One could easily snap up CDs paying a quality rate along with bonds too.

For most Americans, higher rates hurt, but it would seem to me that higher rates could help people with little to no debt. I would LOVE to snap up CDs paying a quality rate, and I have little debt.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Uncle Pennybags »

TradingPlaces wrote:
Call_Me_Op wrote:
bhsince87 wrote:Because their neighbors are going to get higher rate mortgages, and it is always better to have the lowest rate mortgage on the block.
My first mortgage was a 30 year fixed at about 16%, a special low rate for first time home buyers. As rates dropped I never knew when to catch the falling refinance knife. If rates are going up one doesn't have to waste brain cells thinking about refinancing.

As for ARMs, ouch.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by scone »

It just seems like sound and fury, social signaling, and handwaving. If the Fed really wanted rates to go up, wouldn't they sell off their pool of bonds, or at least let the short end mature without buying more? :?
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by kolea »

scone wrote:It just seems like sound and fury, social signaling, and handwaving. If the Fed really wanted rates to go up, wouldn't they sell off their pool of bonds, or at least let the short end mature without buying more? :?
I am not an expert in monetary matters at all but I believe if they sold all the bills and notes they have been buying that the main effect will be to tighten up the money supply which will lower inflation. Even though inflation is generally thought of as evil, it is a necessary evil. I think the Fed wants it pretty much to stay where it is. In fact they might let it float upward a bit due to the huge trade imbalance we have and to devalue all the debt that has accumulated since 2008.

The rate the Fed would adjust is the discount rate, which is the rate charged for overnight loans. But the discount rate will eventually affect commercial and residential loans but not the interest of US securities, at least not directly. That is my understanding.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by scone »

^ Yes, this is my understanding as well. But the bond pool as it is now, is an artifact of the crash, and AFAIK the Fed has always said it would eventually let it shrink. But as time goes on, if the Fed continues to raise rates, however slowly, you get a glaring mismatch between the "normalization" signal of higher rates, and the "ongoing emergency" signal of the bond pool. I would think, at some point, the bond market asks for a resolution-- not to mention getting some liquidity back.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Hodor »

The Fed selling off the bonds it acquired in QE3 would have much the same effect as raising the Fed Funds Rate. Them selling large quantities of bonds raises the supply on the market, allowing investors to demand higher interest rates.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by ShiftF5 »

I say bring it on and let's get on with life.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by JonnyDVM »

As a guy planning to purchase a larger home in late 2016 I don't feel much like rejoicing. In fact I think I just entered denial. I think fear is next.

Oh, add to that that we've spent the last two years busting to pay off heaps of student debt and I'll be in anger at no time.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by arjking »

nisiprius wrote:A strange thing to me
Your posts are always informative. Thanks!
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by tibbitts »

JonnyDVM wrote:As a guy planning to purchase a larger home in late 2016 I don't feel much like rejoicing. In fact I think I just entered denial. I think fear is next.

Oh, add to that that we've spent the last two years busting to pay off heaps of student debt and I'll be in anger at no time.
It's difficult to predict how higher rates, which may not even apply to longer-term debt, may relate to the condition of the economy overall, and how that may affect you. For example, say you pay a 2% higher on your mortgage each year for 30 years, and you get a 2% pay raise every year. Contrast that with paying 2% less on your mortgage, but earning the same amount in nominal dollars for the next 30 years. You have to be careful what you wish for.
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by DireWolf »

For those without debt and unlikely to ever take out another loan, high interest rates are heaven. Imagine the good old days with 7% CD rates!
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by CantPassAgain »

nisiprius wrote:A strange thing to me is that dividend stocks get so much love while bonds get so much hate, even though everything that's true about dividend stocks (compared to non-dividend-payers) is truer for bonds, and many things that are half-true for dividend stocks are simply true--or very nearly so--about bonds.

For example, there's a saying
"Milk from the cow, eggs from the hens,
And stock, by God, for the dividends."

Well, in the case of bonds it better be "for the interest" because there isn't any capital appreciation over the life of the bond. (OK, there might be a grand total of 0.5% over the life of the bond if it's bought at a discount, but you know). There is no reason for a long-term investor to buy a bond except for the interest payment. Certainly if you buy and sell rather than holding to maturity there are price fluctuations which officially count as capital appreciation AND depreciation, but they cancel out over the life of the bonds.

If the only reason for buying bonds is the interest, then it seems dead obvious that the higher interest rates are, the better.

So now we get to "but when interest rates rise, bonds fall." OK, you are new to investing, you hear the interest rates have gone up... and it's a little counterintuitive that it means that your bond's market value falls, so it's legitimate that they hammer home this point in Investing 101. But when you think about it, it's not surprising. The interest rate on your bond didn't go up, only "the" interest rate--the interest rate you can get on new bonds. Nothing bad has happened to your bond, but there are better ones out there, and you shouldn't expect someone to pay full price for your bond when they can get a better one.

It's just as if you buy a 2013 Gadgetmobile and read that next year's model is going to have much better fuel economy. Is that good or bad news generally for Gadgetmobile fans? Good, of course. Is it good for you? Not directly, your car and its fuel economy doesn't change, and the resale value of your gaz-guzzling Gadgetmobile just dropped. Is it a great big hairy deal? Probably not unless you're a speculator in used cars who just bought a bunch of 2013 Gadgetmobiles expecting to turn them around for a quick killing. Meanwhile, your TCO hasn't changed and when it's time to buy a new Gadgetmobile you will be happy that your next one will be a better car than your current one.

Now, fans of stocks like to put a lot of faith in mean reversion, and like to believe that stock has some rock-solid fundamental value to which the price reverts, so that over the long haul you can ignore price fluctuations because any dip is sure to be temporary. This is at best a dubious half-truth for stocks, but barring default it is actually true for bonds. "Volatility doesn't matter if you're patient, if your stocks go down just wait and they'll come up again" isn't even a half-truth; it might be a quarter-truth or an eighth-truth. But for investment-grade bonds, it is true. What goes down must come up and it most come up on schedule. OK, 98%-true for an individual bond (it could default), and, oh, I dunno, if you're invested in a fund with 6-year duration and you plan to hold for 24 years, maybe 75%-true (the idea being that conceptually, if the fund were a collection of bonds held to maturity, about 75% of them would complete their issue-to-maturity life-cycle while 25% of them would be exposed market fluctuation at the time of purchase or sale).

It's widely claimed that dividend stocks suffer less in downturns than stocks in general. And, true, from 12/31/2007 to 3/6/2009, Total Stock dropped 52%; Nicholas Equity Income only dropped 43%. But Total Bond rose 4.5%!

Bonds are not some kind of magic super-asset, and interest rate sensitivity is important, and inflation risk in nominal bonds is extremely important. The thing I just wanted to rant about is that it is curious, as I say, that dividend stocks are touted for characteristics that they only sorta-kinda-partially have, to a limited and unreliable degree--while bonds, which actually possess all of these characteristics to a much higher degree, are widely disliked.
That is one of the best posts I have ever read on this forum.
jim234
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by jim234 »

My guess if/when they "lift off" is max rate of 1.75% -2.00%, may take a few years to get there.
Honestly, I don't think we will see 5-6% short rates in our lifetime.
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Hodor
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Hodor »

jim234 wrote:My guess if/when they "lift off" is max rate of 1.75% -2.00%, may take a few years to get there.
Honestly, I don't think we will see 5-6% short rates in our lifetime.

On the plus side, that likely means we aren't seeing much in the way of inflation either.
naha66
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by naha66 »

The only rates the Fed controls is overnight, The market controls the rest.

There are two kinds of forecasters: Those who don’t know, and those who don’t know they don’t know.” -- John Kenneth Galbraith, famed economist
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nedsaid
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by nedsaid »

I won't say that I am rejoicing over higher interest rates but it is something that I have been anticipating. One reason that I have kept my stock allocation relatively high (69% at age 56) is the very low interest rates. I have wanted something more like a 40% allocation to bonds rather than an approximate 30%. The idea of bond returns perhaps matching inflation has not really thrilled me. Over time, higher interest rates will mean higher returns in the bond market. This will greatly help me in my efforts to de-risk my portfolio.

The reason that I am not rejoicing and whooping and hollering is that higher interest rates tend to cause lower Price/Earnings ratios in the stock market. Also corporate earnings the last several years have been fantastic, it is hard to imagine that earnings will zoom upwards from here. My thinking is that the raising of short term rates may have a mild restraining impact on the stock market.

Of course, short term rates could be raised by the Federal Reserve Bank and not affect the medium term and long term interest rates. So things like mortgage rates may not be affected at all.

Another effect of this would be to strengthen the US Dollar versus other currencies. This would also suppress the returns of your International Stocks a bit. If you own unhedged International Bond Funds, this won't be good news.

But still there is more good news for investors than bad. Another piece of good news is that inflation is very subdued particularly in the commodities space. Higher inflation doesn't seem to be in the cards right now.
A fool and his money are good for business.
Louis Winthorpe III
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by Louis Winthorpe III »

Idle prediction: this is moot. I think 5 years from now we'll be in a similar rate environment.
kolea
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by kolea »

nedsaid wrote:I won't say that I am rejoicing over higher interest rates but it is something that I have been anticipating. One reason that I have kept my stock allocation relatively high (69% at age 56) is the very low interest rates. I have wanted something more like a 40% allocation to bonds rather than an approximate 30%. The idea of bond returns perhaps matching inflation has not really thrilled me. Over time, higher interest rates will mean higher returns in the bond market. This will greatly help me in my efforts to de-risk my portfolio.

The reason that I am not rejoicing and whooping and hollering is that higher interest rates tend to cause lower Price/Earnings ratios in the stock market. Also corporate earnings the last several years have been fantastic, it is hard to imagine that earnings will zoom upwards from here. My thinking is that the raising of short term rates may have a mild restraining impact on the stock market.
I am pretty much in agreement with you on this. I am at 66% equities at age 64 and I would like to be around 60%.

A lot of people have moved from bonds to equities due to the low interest rates of bonds. This has pushed up the price of equities. When/if interest rates rise people will sell off some of the excess weight in equities to move back into bonds which will cause the market to drop, I imagine. My issue is when/how to lower my AA - do it now, all at once, wait for interest rate change (which might not be for years) or dribble some over, like 1-2%/year, regardless of what interest rates are and what equity markets are doing?
Kolea (pron. ko-lay-uh). Golden plover.
expat
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Re: 3 Reasons to Rejoice Higher Interest Rates

Post by expat »

With inflation so low, they are going to raise interest rates?
The latest inflation rate for the United States is 0.1% through the 12 months ended June 2015 as published by the US government on July 17, 2015. The next update is scheduled for release on August 19, 2015 at 8:30 a.m. ET. It will offer the rate of inflation over the 12 months ended July 2015.
http://www.usinflationcalculator.com/in ... ion-rates/
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