Interest Rates IV

This final sketch - a tad delayed given Santa was in town.

Let’s try to make interest rates work for us. One of the first places to look - one’s portfolio.

The last 10 years have been good to bond holders. Fine. But recalling what we learned earlier, if we still hold bonds then perhaps an adjustment is in order, especially if maturities are far down the road. It’s not likely we want to keep it all there if interest rates are header higher.

Or perhaps we own fixed income mutual funds; perhaps some of those holding are offshore, perhaps sovereign debt (Ger., UK, Finland, Spanish, etc.). Maybe a few of us even own this debt outright. Here too, an adjustment may be in order. With very recent downgrades of Greek and Spanish debt, sovereign risk is assuming center stage. This is something quite new, at least for advanced economies, forcing many of them to pay more for their borrowing regardless one's outlook for the inflation component.

Finally, let’s look at the dollar. The dollar's rise from all-time lows is at least partially due to the expectation that the Fed will begin raising interest rates sooner than previously expected. Higher interest rates, coming off a base of zero, can hardly be considered a threat to economic activity, although as we know now, they are a threat to fixed income prices. But there’s another aspect to consider. Higher interest rates might in fact benefit a good many of us, those who have significantly more floating-rate assets (e.g., bank CDs and money market funds) than floating-rate debt (e.g., adjustable rate mortgages). Just a thought.

Take a look at the yield curve from time to time:(http://www.bloomberg.com/markets/rates/index.html.

We’ve got some tools; add to them, then go for it.

Robert Craven