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What Do Higher Interest Rates Mean for Your Portfolio?

What Do Higher Interest Rates Mean for Your Portfolio?

| March 01, 2021

You may have seen news reports about recent interest rate movements in the media. We want to keep you informed as to what is going on in the markets and offer our perspective on what that means for you and your portfolio.

Recent Interest rate movements

Over the past couple of months, interest rates have increased. The 10-year Treasury, a closely watched security that many consider a bellwether for rates, was yielding about 0.9% at the beginning of 2021. As of the close of trading on February 25th, the 10-year Treasury yielded 1.53%. While this doesn’t seem like much to some, a move of this size and speed has garnered a lot of attention in the relatively calm world of bonds. Similarly, this volatility has spread into the equity markets over the past few days.

Why is this happening?  

We have experienced an increase in economic activity over the past few months. Another round of stimulus checks along with mass distribution of the vaccine has brightened prospects even further. However, some fear that these factors could lead to an overheated economy, resulting in higher interest rates and inflation. The volatility has spread to the equity market because inflation and high interest rates have often been negative for business and profits.

What happens now?

While the perception of economic conditions has pushed rates higher, there is a powerful player on the other side of this who disagrees. Chair of the Federal Reserve, Jerome Powell, recently stated he believes interest rates will remain low for a considerable period and doesn’t expect inflation to reach the Fed’s 2% target for perhaps three years. This is part of the ebb and flow of investing as the market adjusts to an economic transition. We will, as always, be monitoring these events and any potential impacts to you or your portfolios.

What does this mean for my portfolio?

While parts of fixed-income allocations have come under modest pressure recently, there could be some positives from a longer-term perspective. First, it shows the economy may be strengthening, given the prospects of a return to a more normal environment. That is vital for future investment returns. Second, income from bonds is an important part of future returns for most investors, so sustained periods of near-zero interest rates aren’t doing us any favors. Near-term pressure on bond prices may take away from current returns but could result in larger payments in the years to come.

What should I do?

It is likely that we have already done a lot to prepare for this.  An important part of our process is to build portfolios in anticipation of changes in market conditions - not in reaction to them. We hope that the sudden and severe market declines of the pandemic followed by the powerful recovery to new highs has demonstrated that. As the world hopefully reopens and the economy adjusts, we will continue to be there for you.

As always, communication is key to our success. If you have any questions or concerns, we are here.

Roberto J. Duran, CFP®, ChFC®, CRPC®, CBEC® 
Sources of data: WSJ, US Federal Reserve, CNBC