Anyone looking for a loan – whether it’s a home loan, personal loan, car loan or credit card loan – should be prepared to pay higher interest rates. .
As the Fed has embarked on a major campaign to raise the federal funds rate, other interest rates are following suit.
The Fed has raised the fed funds target by 0.75 percentage points so far, starting in March, and most interest rate futures traders are forecasting another 1.5 to 1, 75 percentage point coming this year.
On May 9, the 10-year Treasury yield hit 3.2%, its highest level since November 2018.
Meanwhile, the 30-year fixed-rate mortgage averaged 5.27% in the week ended May 5, a 12-year high, based on Freddie Mac. The rate fell from 5.1% a week earlier to 2.96% a year earlier.
“Mortgages now compared to just a few months ago are costing homebuyers more,” said Lawrence Yun, chief economist at the National Association of Realtors. said in a recent speech.
Given our raging inflation (consumer prices are up 8.5% in the 12 months to March) and likely Fed rate hikes, bond yields are likely even higher.
In a recent JPMorgan survey of the investment firm’s most active clients who invest/trade in treasury bills and other interest rate vehicles, 44% were short on treasury bills and other interest rate vehicles. other interest rate exposures, double the amount that was long. A total of 34% were neutral.
A bond short sale is a bet that security prices will fall and yields will rise.
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Don’t give up on bonds
With this scenario in mind, how should a bond investor react? Now is not the time to give up on bonds, says Aaron Brown, former head of capital markets research at AQR Capital Management.
“There is reason to believe that bonds will more than offset recent drawdowns,” he wrote on Bloomberg. Bonds lose when interest rates rise more than expected. If this continues indefinitely, the bonds may lose value to zero.
But Brown doesn’t see that happening. “In the United States, interest rates have consistently returned to lower levels,” he said.
“When this happens, bond investors are holding high-coupon bonds in a low interest rate environment, which means they are making big capital gains. The bigger the bond losses on the downside , the higher the interest rates, the greater the profits on the upside.
Treasury bills and CDs
You may want to avoid bond funds, as their value will fall if yields rise. Instead, you can opt for individual bonds.
Conservative investors can buy treasury bills because they are almost guaranteed to recover the face value of the bonds when the bonds mature.
And Treasury yields are starting to look attractive. You can make your purchases in phases, so that if the returns continue to rise, you can take advantage of them.
You might also consider Series I Treasury Savings Bonds. These bonds have yields that move with inflation and the payout totals 9.62% through October.
Certificates of deposit are almost as safe as treasury bills, and some of them now have higher yields than treasury bills. You can get a three-year CD with a yield of 3.1%, compared to a three-year Treasury yield of 2.85%