Falling bond prices and rising yields have been the talk of the town in recent days. We felt it might be helpful, therefore, to discuss the notion of higher rates and what they may mean for you and your portfolio.
If you have resided on planet earth over the last several years, you are likely aware that interest rates, especially in the U.S., have been held at exceptionally low levels. Levels like zero.
This period of low interest rates was the result of a combination of factors going back to 2008 including the mortgage crises, real-estate market crash, stock market crash and economic slowdown.
Low rates is the fed’s way of fighting back. The idea behind low rates is that it can grease the economic wheels. When rates are low, banks may be more willing to lend, while borrowers may be more willing to borrow.
Businesses may try to expand with cheap money, and inflation may accelerate after the money supply has been expanded.
After many years of low yields, the tide may be turning. While the economy remains sluggish to say the least, it has risen off of levels seen in recent years. If you have watched or listened to the news at all, you are likely also aware that the fed is getting ready to hike interest rates in the U.S.
The timing of this initial rate hike remains debatable. A June rate hike seems to be off the table at this point, while September remains a possibility. Some feel that the central bank will hold off until sometime next year. As has been the case for a while now, the fed says any decisions with regards to rates will be “data dependent.”
Given the recent ascent of bond yields, what is the bond market telling us?
First, let’s discuss this morning’s release of the producer price index (PPI). Producer prices saw a drop last month, coming in with a reading of -.4 percent. Consensus estimates were looking for a rise of .2 percent. Year-over-year prices saw a drop of 1.3 percent which is the largest year-over-year decline since 2010.
Core PPI, minus food and energy, saw a month-over-month drop of -.2 percent. The core reading stands at .8 percent year-over-year.
Inflation has resumed its downtrend. Lower energy prices and a stronger dollar are likely key factors in the ongoing lack of inflation.
Energy prices have, however, been rising in recent weeks. Crude oil prices have risen $20 per barrel from their lows. The dollar index, meanwhile, has apparently topped out and has been trending lower for several weeks.
While inflation remains lacking, the bond market seemingly believes that inflation has bottomed.
What might this mean for you and your investments?
If the bond market is right, it may be time to start considering how higher rates and inflation may effect your portfolio.
Put simply, inflationary pressures may erode the value of holdings, including both equity and fixed income holdings.
If you hold fixed income investments, for example, the value of those investments may decline as rates rise and thus prices drop. On the other hand, equity positions may also decline in value as higher rates begin to compete with long equity positions.
Consider this for a moment:
Looking at the rally in equities the last several years, why do you think the market has gone up the way it has? I’ll give you a hint. It’s not due to the economic outlook, to corporate earnings or to stronger “fundamentals.”
The reality is that in the ongoing low interest rate environment, investors have had no where else to go.
As inflation rises, real returns may be less and less as prices rise and everything becomes relatively more expensive.
While the rise in inflation could be benign, it could also be fast and ferocious. The bond market seems to think that inflation has bottomed out, and will likely only rise from current levels.
This would make sense, after all, given the expansion in the money supply in recent years and an economy that is showing some signs of momentum.
The question you should be asking yourself, therefore, is what can I possibly due to stay ahead of inflation?
Think about this for a moment: How would you feel seeing the value of your fixed income holdings eroded? How would you feel watching much of your recent gains in equities evaporate before your very eyes?
Don’t wait until inflation rears its ugly head. The time to act is now…
We suggest taking a look at hard assets. Hard assets like gold, silver, platinum or palladium. Assets that cannot go bankrupt or default, assets that may hold their value or even rise during inflationary periods.
Precious metals have long been considered a reliable store of value during both inflationary and non-inflationary periods. They have been bought and held by central banks, governments and investors alike for their stability and inherent value.
The global financial marketplace is gearing up for some big changes. Changes in monetary policy, in fiscal policies, interest rates and inflation expectations.
If you are not able to change with it, you and your portfolio may be left in the dust…
Don’t wait until your purchasing power has already declined and your portfolio has lost ground.
It’s time to consider adding anti-inflation assets such as physical gold or silver…
One of the easiest ways to accomplish this is to consider an allocation in gold or silver within your retirement portfolio. It has never been easier than it is today to roll over retirement funds into a precious metals IRA.
To learn more about gold, silver and other precious metals, and how they may potentially fit into your investment strategy, request a copy of our gold IRA guide today.
Tags: inflation, inflation effect on investment, investments, stay ahead of inflation