Should You Worry About Rising Interest Rates?
Look past the 10-year Treasury yield. Smart investors cast a wide net.
![photo illustration of interest rate symbol](https://cdn.mos.cms.futurecdn.net/novLeHpjmV7g5HquWhx6b-415-80.jpg)
The recent rise in U.S. long-term interest rates blew in suddenly enough for headline writers to dust off fraught phrases such as “bond rout,” “investor boycott” and “tantrum.” (Most bond prices sink when interest rates rise and vice versa.) Talk of a burst bubble colors the financial news here and there; it applies to stocks on a bad day, but more openly and brazenly to bonds. (For more on bubbles, see Are Stocks in a Bubble?) The Federal Reserve seems impatient for inflation to reach 2% and stay there. And inflation expectations heavily influence bond traders’ behavior.
But might this fear and loathing be overblown? The broad Bloomberg Barclays Aggregate Bond index is down 3% so far in 2021. The losses are less for municipals and mortgages, more for long Treasuries and investment-grade corporate debt. To drop 3% is equivalent to kissing away nearly two years of yield, but after consecutive annual 8% total returns, this is far from a bond “rout.”
So, then, should you reallocate your income-generating money? Or simply delay investing new dollars into longer-duration taxable bonds and bond funds? I have no objection to the latter. But I dislike dumping long-successful investments because of transitory problems. Even after rising from 0.52% in August to 1.6% recently, 10-year Treasury yields are less than the 1.9% at the outset of 2020. And before you assume 1.6% is a whistle-stop on the way to the 3% T-bond yield last seen in 2018, you can watch for powerful defensive fire from the various financial bulwarks and citadels. “The Fed can be creative on how to taper its bond buying and not create real stress on long-term rates,” says BlackRock bond chief and portfolio manager Rick Rieder, who also maintains that automation and other technologies will restrain inflation.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Congress and the White House also do not want to risk an investor rebellion so early in the new administration. “The stimulus itself is not enough [to cause severe trouble for bonds] if the economy is still shaky,” says Anders Persson, Nuveen’s global fixed-income chief. Plus, the growth hopes stemming from COVID vaccines and the moderately inflationary spike in oil prices are baked into the fresh interest-rate and inflation numbers. That also implies interest rates will not spiral upward all year.
Look to the pros. Now is the time to rely on good managers to find opportunities. “We’re going back to the old playbook,” Persson says. That means bottom-up credit analysis and looking for the sectors and types of bonds (and preferred stocks) that will benefit from the gradually improving health of banks, energy firms, retailers and real estate. Through March 5, a few bond yardsticks are in the green for the year. One is the S&P Municipal Bond 50% Investment Grade/50% High Yield index, up 0.4%. You can copy it with a combination of a high-yield muni fund such as Nuveen High Yield Municipal (symbol NHMRX) and an actively managed high-grade muni fund, such as Baird Strategic (BSNSX) or Fidelity Intermediate-Term Municipal Income (FLTMX).
With stocks, hunt for dividends. Plenty of cash tops off already rich corporate balance sheets, and dividend-oriented sectors including heavy industry, finance, transportation and energy infrastructure all theoretically benefit from the stronger economic growth. Bank stocks are no longer giveaways, but you can still get 3% to 4% dividend yields on newly invested money. Do not rush to cash out profits. The likes of 3M (MMM, $181), Illinois Tool Works (ITW, $210) and United Parcel Service (UPS, $164) offer above-average yields and have earnings momentum. Utility shares are at the lower end of their trading range. So are Verizon (VZ, $56) and AT&T (T, $30). Keep calm, then, and look past the 10-year Treasury yield. Smart investors cast a wide net.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
June CPI Report Comes in Soft: What the Experts Are Saying About Inflation
CPI Odds rise for a September rate cut after prices fall on a monthly basis for the first time in almost two years.
By Dan Burrows Published
-
Best Closed-End Funds (CEFs) to Buy Now
The best closed-end funds will significantly boost your portfolio income and allow you to buy their underlying stocks and bonds at a discount.
By Charles Lewis Sizemore, CFA Published
-
Softer June Jobs Report Raises Rate-Cut Bets
Jobs Report Slower hiring and a rise in the unemployment rate up the odds of the Fed easing more than once before year-end, experts say.
By Dan Burrows Published
-
Fed Holds Rates Steady, Sees Just One Cut This Year: What the Experts Are Saying
Federal Reserve The Federal Reserve kept interest rates unchanged and penciled in one quarter-point cut in 2024.
By Dan Burrows Published
-
May CPI Report Comes in Soft: What the Experts Are Saying About Inflation
CPI A slowdown in inflation keeps the Fed on track for rate cuts later this year.
By Dan Burrows Published
-
When Will the Fed Cut Rates? The Experts Weigh In
Federal Reserve The timing of the first quarter-point cut to the federal funds rate remains as opaque as ever.
By Dan Burrows Published
-
May's Jobs Growth Blows Past Forecasts: What the Experts Are Saying
Jobs Report A blowout jobs report and a bit of wage inflation means a Fed pivot towards easing will have to wait.
By Dan Burrows Published
-
April CPI Report Offers Some Relief: What the Experts Are Saying About Inflation
CPI CPI moderated last month, boosting hopes for interest rate cuts coming sooner rather than later.
By Dan Burrows Published