Interest Rates Are Heading Higher

By: Andrew J. Willms

President and CEO of The Milwaukee Company

It may come as no surprise to hear that interest rates have been trending lower since September of 1981, when the U.S. 10-year Treasury Note reached an all-time high of 15.82%. But a lot can change in 40 years and by the start of 2021 rates stood at less than 1%. Since then, however, yields have begun rising, with the 10-year rate now above 1.5%.

As always, there’s an inverse relationship between rates and prices. In other words, rising yields are a byproduct of falling bond prices, and vice versa.

The 10-year Treasury yield casts a long shadow over the world’s interest rates and so it’s no surprise that mortgage rates are also rising, although they remain near all-time lows. Nonetheless, it’s notable that mortgage rates last week rose to the highest point since August 2020. The average interest rate on a 30-year fixed-rate mortgage hit 2.97% and the 15-year fixed-rate mortgage rose to 2.34%, according to Freddie Mac.

Federal Reserve Chairman Jerome Powell seems unconcerned, however. The Fed’s target interest rate – the Fed funds rate that banks use for overnight lending -- remains at a record low of 0%-to-0.25% range. Powell told Congress on Wednesday that the central bank will not start raising rates until its goals for maximum employment and inflation have been reached (which he does not expect to happen any time soon).

The reasons rates are rising include an improving economic climate and prospects for yet more government stimulus spending. The addition of trillions of dollars into the economy also threatens to lessen the value of the U.S. dollar. If the dollar falls (relative to foreign currencies), investors will likely insist on higher rates before investing in dollar-denominated bonds.

Another cause for rising rates is the prospect for higher inflation. Pent-up consumer demand and record-high savings-account balances set the stage for rising prices. Higher inflation often goes hand in hand with higher rates as the Fed raises rates in an effort to slow spending and thereby put downward pressure on inflation.

Will rates continue to rise? No one knows for sure. While rates have been trending lower for about 40 years, there have been numerous occasions when they rose temporarily only to resume their downward course. If I was a betting man (which I am not), I would put my money on rates continuing on an upward trend in the weeks and months ahead.

Given that, I think it is prudent for investors to consider lowering their risk to rising rates. Options include investing in shorter-term and mortgage-backed bonds, and Treasury Inflation Protected Securities (TIPS).

Gold is often regarded as a hedge against inflation, but its track record is mixed and you must sell it to receive a return on your investment.

Real estate investment trusts have a propensity to do well when rates are rising, provided the rise is modest. That’s due in large part to the potential for real estate prices and rental rates to rise with, and even outpace, interest rates.

Historical data show that the Standard & Poor's 500, a broad measure of U.S. equities, rose in 12 of the 15 periods since 1950 when the 10-year Treasury yield was rising – 80% of the time. Better yet, the S&P 500 posted average annualized returns of 12.6 percent during those 15 periods.

On my March 10th podcast I will be talking with bond expert Dan Dujmic about bond strategies that can help reduce the negative impact rising rates have on bond portfolios. If you haven’t already subscribed to my weekly podcast you can do so HERE[LZ1] . (BTW, this coming week I talk with Attorney Maureen O’Leary on how pending and proposed changes to the gift and estate tax provisions of the Internal Revenue Code could impact investors. You don’t want to miss that one either!)

Thank you for reading.

By: Andrew J. Willms

President and CEO of The Milwaukee Company


Speaking of podcasts, this past week I was joined by joined by Dimitri Delis, Ph.D., for my Market Commentator podcast. We discussed the strength of the economic recovery, whether investors need to be concerned about inflation in 2021, and the outlook for stocks. You can listen in on our discussion HERE or on YouTube HERE.

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