Jan 27, 2023
What rising interest rates mean for you
As you casually browse online for a new home, you might see an advertisement showing about a 7% interest rate for a 30-year home mortgage and think to yourself, “How can that be? I just checked last year, and mortgage rates were closer to 3%!”
Well, you’re not alone. The Federal Reserve is battling the highest inflation in 40 years by aggressively hiking interest rates.1 Higher interest rates make it more expensive to borrow, and this impacts the housing market as well. We know that buying a house has gotten more expensive, but how else can rising rates impact your life in the real world?
Higher interest rates on variable debt, like credit cards
- Certain debt forms, such as credit cards, do not lend you funds at a fixed rate.
- Instead, interest rates are variable. Higher interest rates may cause your payments to increase, and you could end up paying more in interest costs.
We recommend paying off credit cards and other high-interest, variable-rate debt in today’s rising interest rate environment.
Higher savings rates
Your idle cash can now earn more interest in a high-yield savings account or money-market mutual fund. Although this is positive, in times of high inflation, you may still be losing purchasing power if the rate of inflation is higher than the interest rate you are earning.
The impact on stocks and bonds
Your investment portfolio may serve as your nest egg and vehicle for wealth preservation and accumulation. It’s very important to recognize the impact of higher rates on your investments.
- Bonds typically serve to provide income and stability in your portfolio. Bond prices are generally hurt in the short term because rising rates make newer bonds with higher yields more attractive. The ability to invest at higher yields as rates rise makes bonds more attractive. Stocks are typically the capital appreciation vehicle of your portfolio.2 High-growth or unprofitable companies tend to be most negatively impacted by rising rates as cash flows that are far into the future become less valuable with better yielding options available now. Highly indebted companies will typically face higher debt payments and may suffer more than other companies.3
Ideas for your portfolio
Stocks have been volatile this year, but some areas may be primed to outperform in an inflationary and rising rate environment:4
Value stocks: Companies that are undervalued relative to the broader market in addition to having higher fixed costs relative to variable costs subject to inflation. Their exposure to commodity producers and cyclical industries, such as financials, is usually beneficial.5
Real estate: Provides an inflationary hedge as landlords of underlying properties can raise rents on tenants. The underlying income generation may keep pace or exceed the rate of inflation.
Quality companies paying dividends: Profitable companies providing consistent and growing income streams may provide stability and reduce risk during volatile markets.
Bonds have been pummeled this year, but the highest yields in 15 years may make them an attractive proposition.6 Yields of more than 5% are available on highly rated bonds, and investors finally have options for income generation and respectable risk-adjusted returns in the coming years.7
Protecting against rising interest rates is prudent, but we may be approaching a peak in rates. In our view, capturing higher yields and taking on slightly more interest rate risk without significantly increasing credit risk makes sense right now.
Private investments may be able to help reduce risk, enhance returns, generate higher yields and offer additional tax advantages that may not be possible to achieve solely with public investments. Floating-rate loans and private real estate investments can be particularly advantageous in the current environment.
7 Source: U.S. Department of the Treasury
ABOUT THE AUTHOR
With more than a decade of financial services experience, Sagar Shah joined RegentAtlantic as Client Portfolio Manager. In this capacity, he is responsible for developing and communicating content for the Firm's investment philosophy and interacts regularly with RegentAtlantic's clients about their investment portfolios.
As a core member of the Investment Team, he plays an instrumental role in investment-related communications and analysis. Sagar previously held roles in equity research, healthcare finance, and treasury at large institutions.
Sagar graduated with a BS in Biology from The College of New Jersey and holds an MBA in Finance from Rutgers University. He is also a CFA Charterholder and a member of the CFA Society of New York. He has been cited in numerous investment-related publications including Forbes Intelligent Investing.
In his free time, Sagar enjoys working out, outdoor activities, reading, and spending time with family and friends.
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