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Investors, savers: Words to the wise as interest rates rise

Most of us are savers, investors or borrowers.

Depending upon what we have most – savings, investments or debts – the near historic lows or interest rates are good or bad.

Savers, if you have been disappointed and disillusioned with returns the last 10 years, then maybe things will begin to improve.

That’s the good news – that earnings soon may increase.

The bad news is you won’t notice it very much because any increases will be minimal for the foreseeable future, and banks are slow to pass along those rewards to customers.


Borrowers will be first to see those increases. If you have not refinanced your loans and locked in low rates, you are rapidly running out of time.

Yes, they are already higher than last summer and are likely to go much higher. In fact, the longer the term of your loan, probably the better.

If you have a floating rate loan, run immediately to your banker and convert it to fixed.


By the time your short-term loans reset and you decide to lock in a longer loan, those rates also will be higher. And you will be frustrated in missing an opportunity that may not present itself for decades.


As for investors, will they be happier? Yes, maybe and no.

That depends, as always, on the types of fixed income investments they own.

A truism of investing is that risk is usually a function of reward.

You may have heard that there is no free lunch. In fixed income markets, there is a “positively sloped yield curve.”

The further one goes out in time, the greater the return. However, the further one goes out in time, the greater uncertainty one assumes.


Remember when one-year certificates of deposit paid 1 percent, two-year CDs paid 2 percent and five-year CDs paid 3 percent? That was a positively sloped yield curve.

What if you could buy a five-year CD or treasury bond that paid 5 percent or even a 10-year bond that paid 7 percent? Why would one not make that investment today?

First, those investments do not exist. But if they did, what would you do?

The easy answer is to opt for the higher return. Why not? What could be wrong with that?


Well, life happens. Five years and certainly 10 years are long periods of time. Over that time, your conditions may alter and you may need to access your investment.

Say, for example, you need to access that 10-year bond. How bad could it be?

The answer depends upon how much interest rates have moved up – since bond prices/values and interest rates move in opposite directions.

And the further out on the yield curve, the greater the volatility.

(Mutual funds and exchanged traded funds act the same way. They even could perform worse.)

Remember, the longer the maturity date, the greater the loss. Many investors, in fact, own bond funds with maturities longer than 10 years.


Many investors are either worried about their investment alternatives and merely cannot afford the risk that today’s high market valuations represent, or are oblivious to them. Yet they do need some return beyond what the traditional short-term alternatives now provide.

In a word: nada!

As a result, they may be investing in the only alternative that’s left – bonds.

However, as you can see, bonds today have risk, unless you believe interest rates are staying flat or maybe even going down.

And if you believe that, there’s a certain bridge in Brooklyn that’s available for a very good price.

Herman Rij, private wealth adviser and founding partner of Quadrant Private Wealth of Bethlehem, has more than 46 years of experience. He holds the Certified Investment Management Analyst designation and six times was named one of Barron’s “Top 1,000 Financial Advisers in America.” He can be reached at 610-849-2740 or [email protected]

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