Adjusting Our Investments to Today’s Economy

Have you noticed how high rates have gotten on government guaranteed T-bills? Three-month U.S. T-bills pay 4.77% today. Six-month T-bills pay close to 5%. Many banks are offering one year CDs at well over 5%.

Yesterday I wrote about how capital eventually moves to the highest and safest investments. I also talked about various forms of investments and how money has flowed into and out of these investments (stocks, real estate, precious metals) over the last two decades.

The interest rate cycle itself is likely the single most important factor affecting our investment portfolios. In today’s global economy, the direction of interest rates can easily be forecast– what we need to do as investors is to adjust our portfolios according so we can heavily weigh our investments in areas that will benefit from either higher or lower interest rates.

Up until the period ending in 2004, interest rates in the U.S. and the majority of the industrialized countries fell to 20-year lows. The tide changed in 2004 when then Fed Chairman Greenspan started raising rates. Consider where we are today, less than two years after interest rates started going up:

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— Borrowing costs are at their highest level in five years.

— Yields on most bonds, T-bills, and CDs are also at five year highs.

— The bellwether 10-year U.S. bond, yielding 5.09%, is at the highest yield since June 2002.

Basically, everywhere you look, suddenly investment yields on debt instruments are at 5-year highs. And it’s not stopping there. Interest rate futures show traders are almost 100% certain the Fed will rates again in early May. Traders are 50/50 split on rates rising again in June.

Have you adjusted your portfolio to take into account rising interest rates in today’s economy? All you need to do is ask yourself what investments do well under economic environments when rates are rising? Economics 101 says big-cap stocks and real estate do not perform well when interest rates rise. The proverbial writing is on the wall. What are you doing about it?