HOUSTON, DO WE HAVE A PROBLEM?
What will happen when interest rates rise? How will it affect your portfolio and the economy at large? This month we consider the potential disruptive force of rising U.S. interest rates and suggest a time-tested strategy for protection.
In the latest bout of volatility, long-term interest rates in the United States climbed by almost 0.4 percentage points. Ten-year U.S. Treasury bonds are yielding 2.39%, up from 1.97% in late March. International long-term interest rates, particularly in Germany, have climbed even more steeply. The 10-year Bund yield briefly brushed the 1% level in early June after trading as low as 0.08% in April.
Some pundits suggest that a generation-long shift toward ever-lower global interest rates may have finally run its course. Have world bond markets reached the tipping point? Opinions are divided, and only time will tell. What’s the average investor to do?
Our advice—regardless of what financial pundits suggest—is that the best defense against uncertainty is a sound financial plan. Remain consistently disciplined and follow an investment strategy tailored to your goals and risk tolerance. Disregard the noise of the markets and so-called experts. Adopt a long-term focus. Be patient. And if the eventual departure from low interest rates triggers a downdraft, assume a rebalancing opportunity.
Below we take a look at the risks to financial markets in the aftermath of quantitative easing. But first, let’s review the numbers from May.