Debtors hate rising interest rates, but investors? Some are cheering them. Retirees and others focused on holding a diversified portfolio can now get returns with less risk.
The 60/40 portfolio, made of 60% stocks and 40% bonds, went out of style when the Fed was holding interest rates to zero or just above, thus hammering the bond market.
Now assets tied to interest rates are back in vogue. Due to the Federal Reserve raising interest rates to tamp down inflation, advisors say they're showing clients investments they haven't touted in years. Assets like CDs, bonds and bond ladders, money market funds, annuities and more are back in fashion.
Some of these low-risk assets are offering returns of 6% and more. Perhaps that's less than thrilling — until you recall that the S&P was down 26.7% in mid-October and the Nasdaq was down more than 32%.
"If you've been a good steward of your money for the last five years, due to rising interest rates you now have the ability to get investment returns, without taking the risks of the equity markets," said Brandon Reese, senior wealth advisor at TBS Retirement Planning in Hurst, Texas.
Let's be clear, some of these less risky investments aren't outpacing the inflation rate. But they aren't devaluing either. And many of them provide safe havens during recessionary times, which economists and bankers are predicting for 2023.
Rising Interest Rates Now, But Before, 'Money For Nothin'
Conservative investors have been frustrated by the Fed's policies for more than a decade, when it held interest rates extremely low — some would say artificially low. These moves pounded the bond market. And they left investors moving more money into stocks and stock-based funds in an effort to pull in returns.
"The fact that the Fed funds rate spent better part of 15 years at or close to zero was certainly a surprise," said Greg McBride, chief financial analyst at Bankrate.com.
Go back to December 1980 and the Fed funds rate was an astounding 19% to 20%, the highest ever. It had raised interest rates in an effort to combat double-digit inflation. By July 1990, inflation was down and the Fed funds rate was 8%, and by February 1995 it was 6%. Even as recently as March 2000, the Fed funds rate was still 6%.
Reacting to the dot.com stock market bust and the economic impact of the 9/11 attacks, the Fed started cutting rates significantly in 2001, getting all the way down to 1.75% by December 2001. As markets and the economy improved, it started raising rates again and by the end of June 2006 the funds rate was 5.25%.
But the financial crisis of 2008 caused the Fed to go rate slashing again. The lowest rate? The Fed funds rate went to 0.0% to 0.25% back in December 2008 and the rate hit that low level again in March 2020, as the Fed responded to the pandemic and related shutdowns.
From April 2008 all the way until Dec. 2018, the Fed funds rate never rose above 2.5%. Then the pandemic spurred more rate cuts.
Rates finally rose above 2.5% in just September of this year. On Dec. 14, the Fed funds rate was set at 4.25% to 4.5%.
Harvesting High Interest: Annuities And Bonds
Where can investors get 6% or more right now? Several places: TreasuryDirect I Bonds (now paying 6.89% through April 2023), highly rated corporate bonds and annuities.
Investment advisor Ryan Shuchman, with Cornerstone Financial Services in Southfield, Mich., is advising some clients to consider multiyear guaranteed annuities (MYGAs), a type of fixed annuity that offers a guaranteed fixed interest rate for three to 10 years.
"Right now, MYGAs are providing some pretty attractive returns, all driven in part by those higher interest rates, said Shuchman.
He's also helping some clients look for high-quality corporate bonds, which he says can currently bring in a 5% to 6% return. Some Treasury bonds today offer rates above 4.5%.
Even CDs now offer decent rates. "A two-year CD right now is close to 4.5%," said Shuchman.
Cash Pays Now: Get A Higher Savings Rate
If you haven't shopped for better savings rates for your emergency fund or other cash accounts, now's the time. Those 1% or less bank savings rates are so 2021.
Accounts used by investment banks to hold funds between trades (some are money market funds and some are hybrid accounts) have been moving up steadily. "They're offering 3% or even 4%," said Reese.
And money market fund rates are in the same range, says Bankrate.com.
Even some previously stingy banks have started to raise savings interest rates.
Invest In Yourself: Pay Down High-Interest Debt
Fed policymakers said this month that its fund rate could go to 5.1% next year. That means variable rates for credit cards and other types of credit could continue to rise.
According to LendingTree, the average APR offered with a new credit card in early December was a painful 22.91%. It says that's the highest rate since LendingTree began tracking rates monthly in 2019.
As of Dec. 21, Bankrate's McBride said the average rate for credit card debt was 19.55%, and for home equity lines of credit it was 7.63%.
Want to know how long it will take you to pay down your credit card debt? Reese suggests taking a look at debt reduction calculators.
"It's a great time to be paying down variable-rate debt and high-cost debt," said McBride. "Credit card rates are at record highs and they're going higher."
McBride recommends debtors shop for a card offering a "low-rate transfer" promotion. He says some of them offer a lower rate that's "good for 21 months."
He added: "That can turbocharge your debt-repayment efforts."
