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Investing When Interest Rates Rise
Old 09-14-2004, 08:19 PM   #1
 
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Investing When Interest Rates Rise

Since interest rates are at historical lows, it is probable that rates will increase in the long-term.

If that assumption is true, would it make sense to invest in the Profunds Rising Rate Opportunity Fund (RRPIX)?
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Re: Investing When Interest Rates Rise
Old 09-14-2004, 09:44 PM   #2
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Re: Investing When Interest Rates Rise

It doesn't look very appetizing to me. It looks like they use options to bet that long-term treasuries will drop. That's probably a good bet long-term, but options force you to pick *when* you think the drop will happen. They've obviously been wrong so far, and the fund is down something like 12%.
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Re: Investing When Interest Rates Rise
Old 09-14-2004, 10:23 PM   #3
 
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Re: Investing When Interest Rates Rise

I've been expecting rates to raise for years. As a result, I've stayed too short. Don't try to time the market. Diversify, and ladder your bonds.
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Re: Investing When Interest Rates Rise
Old 09-14-2004, 11:04 PM   #4
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Re: Investing When Interest Rates Rise

Quote:
I've been expecting rates to raise for years. *As a result, I've stayed too short. *Don't try to time the market. *Diversify, and ladder your bonds.
Of course, it's high demand that is keeping rates low. *So, it's exactly this sort of capitulation that will cause rates to rise. * You can't win *

FWIW, I recently liquidated a large chunk of short-term bonds. * The spreads between corporate and treasuries are so thin that it makes no sense to hold short-term corp any longer. * And the negative spreads between munis and treasuries are so large, that it makes no sense to hold munis either.

There are quite a few short-term CDs out there yielding close to 3%, which beats just about every type of short-term bond right now.

And rather than extend my bond ladders with pitiful yields, I've been reluctantly buying high-dividend stocks. * Which is just what Greenspan wants me to do. *So, you can thank me for helping to prop up these rediculous stock prices *
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 04:56 AM   #5
 
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Re: Investing When Interest Rates Rise

Interest rates are like the weather. We all talk about it. I am somewhat flummoxed right now as I've gone 100% long term/high yield bonds on my entire IRA. I have thought about switching it all back to CDs if rates went up
faster than my NAV eroded, but the IRA is doing well
and rates remain low. In the next 60 days I expect to
receive a big infusion of cash from some callable corporate
notes I have held for years. My broker says they will
be called for sure. Now, the IRA and the corp. notes
are my "forever" money. I will not need to touch the
initial investment. It just has to throw off the
maximum income. So, another big decision coming up.
It's sure better than not having any money to fuss
over though

John Galt
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 08:03 AM   #6
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Re: Investing When Interest Rates Rise

Hey John,

Vanguard's GNMA fund is currently paying 4.62%. It
has a good record, particularly in a rising interest rate
environment. It might be a good place to park your
long term money if you are waiting for long rates
to go up.....which might take a while.

Cheers,

Charlie
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 08:45 AM   #7
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Re: Investing When Interest Rates Rise

Just read an interesting article on bonds.

Basically said to forget corporates due to the mentioned thin yields.

Skip high yield bonds as the dividend premium doesnt warrant the risk.

Skip I-bonds unless the interest rate is 2%+ (currently 1%).

Buy tips if you think inflation will rise and interest rates will stay tame.

Buy EE bonds if you think rates will rise but inflation will stay tame.

Pretty much all of which makes sense and makes me want to bang my head on the desk.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 10:27 AM   #8
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Re: Investing When Interest Rates Rise

TH,

Do you have a link to that article?

Thanks,
Alec
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 10:52 AM   #9
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Re: Investing When Interest Rates Rise

Quote:
Just read an interesting article on bonds.

Basically said to forget corporates due to the mentioned thin yields.

Skip high yield bonds as the dividend premium doesnt warrant the risk.

Skip I-bonds unless the interest rate is 2%+ (currently 1%).

Buy tips if you think inflation will rise and interest rates will stay tame.

Buy EE bonds if you think rates will rise but inflation will stay tame.

Pretty much all of which makes sense and makes me want to bang my head on the desk.
Makes sense to me. That's why I have largely ignored fixed income investments lately, aside from the occasional high yield CD.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 12:11 PM   #10
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Re: Investing When Interest Rates Rise

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Pretty much all of which makes sense and makes me want to bang my head on the desk.
As much as I am excited to ER in 6 to 7 months, I am not looking forward to managing of my portfolio since I don't have a few million in the bank to live on.
I have to admire your courage in retiring as early as you did, and to boot, getting married and become a daddy.

MJ
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 12:34 PM   #11
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Re: Investing When Interest Rates Rise

Looking over a relatively long period of time, low interest rates have often been a bullish signal for stocks more than anything, but slightly less so once they start rising (but are still "low"). Traditionally, long-term bonds are avoided in rising interest rates though they seem to be doing decent here lately. Fixed income investments arn't real attractive with low interest rates (because.... duh.... interest rates are low).
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 12:51 PM   #12
 
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Re: Investing When Interest Rates Rise

Interest rates are low and the market looks overvalued. I think I'll diversify!

Now I'm confused. I just went through my fixed income portfolio and decided to keep Vanguard ST Corp, and IT Muni. I pay 8% state tax and 27% fed tax

Vang fund: Rate - Fed Tax - STate Tax = effective yeild

STCorp: 2.93 - .79 - .23 = 1.91% (maturity 1.8 years)
STTeas: 2.44 - .65 - 0 = 1.79% (maturity 1.8 years)
ITMuni : 3.07 - 0 - .24 = 2.83% (maturity 4.7 years)
ITCorp: 4.21 - 1.13 - .33 = 2.75 (maturity 4.7 years)
2yrCD: 2.875 - .776 - .23 = 1.87%
5yrCD: 4.0 - 1.08 - .32 = 2.6%
I Bond: 3.39 - .91 - 0 = 2.48%
EE Bond: 2.84 - .767 - 0 = 2.07%

I Bonds and EE Bonds have some attractive benefits:
- interest accrues tax free until the bond is cashed.
- holding period is 5 to 30 years (can be cashed sooner with 3 mo. penality.)
- can be cashed tax free to pay for a childs education.
- rates are adjusted every 6 months.

I concluded that holding onto the ST Corp and IT Muni is reasonable given the spreads in interest rates.



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Re: Investing When Interest Rates Rise
Old 09-15-2004, 01:10 PM   #13
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Re: Investing When Interest Rates Rise

Quote:
Vang fund: Rate - Fed Tax - STate Tax = effective yeild

STCorp: 2.93 - .79 - .23 = 1.91% (maturity 1.8 years)
STTeas: 2.44 - .65 - 0 = 1.79% (maturity 1.8 years)
ITMuni : 3.07 - 0 - .24 = 2.83% (maturity 4.7 years)
ITCorp: 4.21 - 1.13 - .33 = 2.75 (maturity 4.7 years)
2yrCD: 2.875 - .776 - .23 = 1.87%
5yrCD: 4.0 - 1.08 - .32 = 2.6%
I Bond: 3.39 - .91 - 0 = 2.48%
EE Bond: 2.84 - .767 - 0 = 2.07%
Now just throw in inflation, and you should be right at 0% yield. Yipee!

Think i'll stick with stocks (but diversify too. Its not either/or)
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 01:22 PM   #14
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Re: Investing When Interest Rates Rise

Quote:
STCorp: 2.93 - .79 - .23 *= 1.91% (maturity 1.8 years)
STTeas: 2.44 - .65 - 0 * * = 1.79% (maturity 1.8 years)
2yrCD: 2.875 - .776 - .23 = 1.87%
First, those are not maturities, they're durations. * Second, you're comparing SEC yields which don't necessarily tell you current conditions.

So, here's the data I used based on current yields:

2-Year treasury: 2.46%
2-Year AA corp: 2.55%
2-Year AA muni: 1.35%
1-Year IndyMac CD: 2.9% (several others in this range)

You're getting very little premium for taking on the risk associated with corporate dept. * *You're taking a huge haircut for the tax-break on munis. * And you can get a higher yield from a CD with zero risk and shorter-term maturity.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 01:34 PM   #15
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Re: Investing When Interest Rates Rise

I'm sure you guys know bonds better than i do since I only use them to offset my stock risk, but i've read (in multiple books) its hard to beat just a plain-jane, intermediate-term, investment grade bond fund (with a low expense ratio of course). *

I also like bond funds that mix in a little high-yield, but mitigate the risk such as Janus Flexible income (JAFIX). *Just that one fund would give you all the diversification you need, and a wonderful, "autopilot" return. *There are better ones than that, but its the one I use.

Easy portfolios are underrated, IMHO. *Having to manage individual securities cuts into my tennis time.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 01:43 PM   #16
 
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Re: Investing When Interest Rates Rise

Thanks for the clarification.

The thing I like about these Vanguard funds is that I can put my money there, and forget about it. These funds saved my ass in 2000-2003. I'd be working today if I didn't put a significant portion of my savings there.

I'm planning to move some $ over to CDs too.

I don't like these low yeilds, but I also don't want the risk associated with stocks. My stock allocation is around 50%.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 01:43 PM   #17
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Re: Investing When Interest Rates Rise

azanon, most of those books base their advice on historical results. I prefer predicting the future

An intermediate-term bond fund is fine as long as you're willing to suffer a hit and wait for as long as the average duration of the fund before you're whole again.

My short-term cash is looking for the highest yield possible while it sits on the sidelines looking for good investment opportunities.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 01:54 PM   #18
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Re: Investing When Interest Rates Rise

Quote:
azanon, most of those books base their advice on historical results. *I prefer predicting the future
Well, i know they say past performance doesn't equal future return, but it does beg the question: *What the hell else do you have to base the decision on?

Are the horseraces a fair analogy? *Which horse does the crowd usually think will win (and because of that, pays worse)? *Usually, its the horse and/or jockey that's won in the past. *As you say, those past events certainly dont predict the future, but I know where i'd place my bets if i had the advantage of hindsight, but wasnt penalized for having the advantage of hindsight (as you are at the horse track).
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 02:05 PM   #19
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Re: Investing When Interest Rates Rise

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Are the horseraces a fair analogy?
Fine. You're betting on a horse based on his past wins without considering how well he does in his current environment. Your horse is ready for the pasture.

What else can you consider? Fundamentals. The current interest rate and inflation environment. Demographic trends. Government policy. Economic trends. Risk of terrorism. Etc.

Granted, sometimes even well-founded predictions will be wrong. Sometimes unpredictable human behavior carries the most weight. But virtually any of these forward-looking factors I listed makes for better betting than looking exclusively at past performance.

But make your bets based on history as well. Just don't bet the farm.
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Re: Investing When Interest Rates Rise
Old 09-15-2004, 02:22 PM   #20
 
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Re: Investing When Interest Rates Rise

I have never seen anyone or organization successfully predict the future in my lifetime.

Looking back on predictions that have been made throughout the last several decades *are laughable. I recall a predication made in the mid 70's that 'Gas Station attendent' *would be the fastest growing job. And they were correct in that we all are pumping our own gas - except the job pays nothing!

The one comfort that one can take in the stock market currently, is that almost no one thinks it is a good deal! All you can do is diversify and not get spooked. Easy to say and hard to do.

BTW - I read Harry Dent's book (something about the big boom of the 2000's) *- What a joke - His current forecast for he Dow would be about 18,000, headed to 30,000 around 2008-2010 - before the meltdown!

Does anyone here remember the Jerk Ravi Batra? The Princeton Professor that warned of the Great Depression of the 1990's? *- His followers took all their money out of the market and moved to the cabin in the woods, to wait out the calamity. Then they could buy cheap stocks while everyone else starved. I think ***** may have been one of them! He's still waiting to buy cheap stocks!
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