Watching Interest Rates

[imoldernu]

Instead of offering up a discussion point about the Stock Market and the future of investments, I'd like to throw out the general subject of interest rates to see what our brain trust here on ER, thinks about how interest rates will affect the near term and long term position of those of us who have already retired.

The ambient "news noise" for the prospects of a change in the position of the FED, re easing, is generating headlines and speculation that is rapidly growing in the media. Some recent bank stress tests are causing rumbles of nervousness, and the Treasury is looking at different parts of the financial system for weaknesses that have been on hold for a few years.

The expression "hair on fire" describes some of the "experts" who are projecting disaster... as well as those who insist on a new bull market "floor".

No one really knows, but since I respect the views of many long time members and the success they have that allowed them to retire already, or who have retirement in their sights... I'd be very interested in thoughts about the current market, and whether there is more or less confidence for the longer term, let's say ten years.

... or perhaps the Interest Rate factor isn't going to be as important as most of the media pundits seem to be saying.

 

[aim-high]

Here are the Tips Yields for the August. They are definitely increasing. I don't know what it means for the long-term, but I am looking forward to getting back to normal, whatever normal is.

DATE	        5 YR	7 YR	10 YR	20 YR	30 YR
08/01/13	-0.45	 0.05	0.48	1.12	1.40
08/02/13	-0.55	-0.04	0.42	1.07	1.35
08/05/13	-0.53	-0.01	0.42	1.07	1.37
08/06/13	-0.55	-0.05	0.39	1.03	1.32
08/07/13	-0.55	-0.06	0.35	0.98	1.27
08/08/13	-0.54	-0.07	0.34	0.96	1.26
08/09/13	-0.55	-0.08	0.33	0.96	1.25
08/12/13	-0.52	-0.05	0.37	1.01	1.30
08/13/13	-0.43	 0.05	0.48	1.11	1.40
08/14/13	-0.38	 0.11	0.50	1.13	1.43
08/15/13	-0.29	 0.18	0.60	1.22	1.51
08/16/13	-0.19	 0.29	0.68	1.29	1.58
08/19/13	-0.13	 0.35	0.75	1.35	1.63
Monday Aug 19, 2013, 3:55 PM

 

[RockyMtn]

A bit of a double edged sword if you ask me.

While I like the idea of higher yields on my bonds/bond funds I don't like the increase in interest rates driving down the value of the bond funds. I've put most of my bond funds in shorter duration funds to try and minimize the increases likely coming (IMHO) of interest rates. Once the yields tick up a bit...say to 3.5 to 4.25 on the ten year US treasury I will start to look at lengthening my durations to take advantage of higher yields.

As for bonds I have a ladder that I just roll over so really not taking any extraordinary actions.

 

[GrayHare]

Sounds like the ACA will increase unemployment, and that will cause the Fed to keep its accommodative stance going longer, which in turn will keep interest rates low for several more years.

 

[calmloki]

I'm looking for around 8% within a few years. 14% and 4% feel equally anomalistic. Currently carrying a contract from 13 years ago at 7% ( too low much of that time) and one for 7% with a 10 year balloon from late last year. Also negotiated adequate protection interest only payments of 6.5% for a place our borrower declared chapter 13 bankruptcy on. I happily borrowed against our two homes at 3% with PenFed on 5/5 loans because the money was just so darn cheap.

 

[daylatedollarshort]

We sold most of our mid and long term fixed income investments earlier this year, so overall I am happy to see rates like the 30 year TIPS go back to more historically normal yields. The short term valuations are hard on the current market portfolio values though, because we still have some mid and long term fixed income investments.

Our retirement budget is based on a pretty low rate of return assumption, so anything back to more normal rates is pretty exciting for our long term finances.

 

[Stevewc]

I'm certainly not one to watch or take advice from, but.
I am watching the muni funds in hope of investing some cash I have on hand as the interest rates rise and NAV's fall.
I wouldn't dare get involved in market timing though.
Steve

 

[Coolius]

Most of my retirement income is derived from a bond ladder, stretching all the way to 2026.

The typical interest is 5%, which is the minimum estimated to sustain our quality of life throughout our remaining time on this planet. ( Supplemented by SS, no pension )

So as rates go up, I am anticipating replacing bonds maturing this year and the next 2 years with bonds yielding higher returns. So, from that perspective, it is a positive for me, barring runaway inflation.

However, the same situation is taking a heavy toll on my other investments which are preferred stocks, REITs, MLPs, and ETDs. These have been hit very hard. I now have to hang on and consider the income from these to be an annuity payment.

 

[rbmrtn]

I'm certainly not one to watch or take advice from, but.
I am watching the muni funds in hope of investing some cash I have on hand as the interest rates rise and NAV's fall.
I wouldn't dare get involved in market timing though.
Steve

There have been several articles recently highlighting closed end muni funds divergence from their NAV

Sizing Up Discounted Muni Closed-End Bond Funds - WSJ.com

 

[Stevewc]

Thanks for the link rbmrtn, I'll start reading up on them.
Steve

 

[urn2bfree]

https://cdns.gigya.com/gs/gigIDsPro...ttp://www.cbsnews.com&apiDomain=US1.gigya.com

Real returns on bonds are better now than they were in 1980 according to the above "fact check"

 

[imoldernu]

Since I don't "invest" per se, I usually follow only the macro economic stories. The increased media attention of the past week or so to banks, derivatives and more particularly interest rates has me looking for any sense of a common trend. This subject has come up in a number of financial sites that will show up in Google.

The Line Bernanke is Praying Won't Break

 

[urn2bfree]

https://cdns.gigya.com/gs/gigIDsProxy.htm?APIKey=2_IzFxsUBVTuu8VV81iUg55sZVZR5Sk9q8-_gMQndgXyVD7vyIISTnyj1s3YpAXBbn&domain=http%3A%2F%2Fwww.cbsnews.com&apiDomain=US1.gigya.com

Real returns on bonds are better now than they were in 1980 according to the above "fact check"

Sorry here is a link that should work

http://www.cbsnews.com/8301-505123_162-57597172/interest-rates-are-near-historic-lows-fact-check/

 

[haha]

Like almost all articles in the popular press, this cherry picks some misleading information to give an intro into an article which really deserves some qualifications. Paul Volcker became FRB Chairman in late 1979, and almost immediately set about creating the mother of all credit crunches. No one really knew what might happen, but since rates were so high, there was at least a chance that he could break the inflation psychology that had taken hold. I don't remember when long rates began to roll over, but it took a while. No one but very clever investors thought it was real.

This article forgets to mention that real rates are backward looking. People talk about real rates as being nominal rates minus some lagged actual or estimated future inflation rate. Well, the 80s turned into the all time party of high real rates. This cannot really happen unless you go into the period with high nominal rates, barring prolonged depression as per Japan.

The other thing the article does is give after-tax results, while most people today don't hold bonds in taxable accounts, and to judge by this board, many people pay 0 or negative taxes after subsidies anyway.

So while there may be some definite opportunities in today's bond market, it is certainly not going to be anything like the 80s.

Ha

 

[imoldernu]

from the Bernancke article

 

[haha]

Instead of offering up a discussion point about the Stock Market and the future of investments, I'd like to throw out the general subject of interest rates to see what our brain trust here on ER, thinks about how interest rates will affect the near term and long term position of those of us who have already retired.

The ambient "news noise" for the prospects of a change in the position of the FED, re easing, is generating headlines and speculation that is rapidly growing in the media. Some recent bank stress tests are causing rumbles of nervousness, and the Treasury is looking at different parts of the financial system for weaknesses that have been on hold for a few years.

The expression "hair on fire" describes some of the "experts" who are projecting disaster... as well as those who insist on a new bull market "floor".

No one really knows, but since I respect the views of many long time members and the success they have that allowed them to retire already, or who have retirement in their sights... I'd be very interested in thoughts about the current market, and whether there is more or less confidence for the longer term, let's say ten years.

... or perhaps the Interest Rate factor isn't going to be as important as most of the media pundits seem to be saying.

You are long term retired; what are your ideas?

Ha

 

[imoldernu]

You are long term retired; what are your ideas?

Ha

I think I've been "outed"...
I'll plead guilty to not being very sophisticated about investing and I catch heck whenever I post anything that sounds negative.
I don't even begin to understand the market, but as I mentioned, the "macro" part of the economy is more my worry.
From the death of Glass Steagall with Gramm Leach Bliley, the controls that were in place to avoid recession, not only empowered the banks to gamble, but at the same time... opened the floodgates of the SEC that were designed to maintain controls. POGO made an attempt in 2009, to expose the failures of the OIG and when that failed to gain support, it opened a financial casino, that eventually caused the beginning of "legal" government support... TARP ignored the letter of the law, and was the start of the incredible game that paid off the bankers, accepted the banks' bad debt into Freddie and Fannie, and then continued to pour good money after bad. That began the shifting of money between the Treasury and the FED, a Shell Game whereby the bad actions of gamblers ended up being added to the National Debt.

So that's the basis of the problem... As long as "The full faith and trust of the US" is enough to satisfy the creditors, then the debt can be issued, however if the creditors lose faith, then in order to borrow more, those who would purchase the debt, would require more incentive... (higher interest rates).
The crisis (if it comes) would come from the fact that the FED "owns" 30% of the Treasury 10 year bonds. An increase of interest rates to 5+% would cause a FED loss of many hundreds of Billions of dollars.
Left to the imagination would be the effect on the National (and World) economy.

When? Of course that is the question. I don't understand enough to guess, but think it maight be sooner rather than later... perhaps less than a year, but as I easily admit, I don't know enough about the market to say. My only reason for the initial post was to see if those who are smarter than me, might have some insight.

 

[haha]

Thanks for your ideas. It may be possible. However, 5% implies about a 215 basis point increase. I don't know if all the bonds they own are low coupon, or if there have been some new ones since rates increased. But call duration 8.5. Very roughly, that rise to 5% should knock off 2.15x8.5, or 17-18 %. So if they lose control (which I am not sure is possible), why can't they just finance everything until maturity with short term money which I believe they can always control. The BOJ just buys everything at whatever price they wish, why not our Ben?

I would like to have a sophisticated money and banking course, because there is an awful lot of this I do not understand.

But from the POV of an investor, there are many ways to get spread besides maturity. Credit, currency, etc.

Overall, I would rather own some skillfully managed spread product with 2- 3 years max duration than 10 year treasuries anyway. I think I worud rather own these than index equity funds also.

This is not an easy time to be an investor.

Ha

 

[youbet]

This is not an easy time to be an investor.

Ha

+1

You have a wonderful way with words and a knack for understatement.

 

[ShokWaveRider]

Here is what I have noticed. Completely non technical and scientifically unsubstantiated.

Saying that, it has proved correct on occasion. "If one talks about it for long enough, it WILL happen" Case in point, the Real estate crash. For about 6 months to a year prior to the RE crash, talking heads were predicting unsustainable home prices based on income etc. Well it happened. Same for the dollar slide. The media's opinions are forced at use from every which way. Whether it be guilty till proven innocent, America will never implement sensible gun control, stock markets is too high, or rising interest rates. They have been predicting higher rates for a while now. So it WILL happen and more sooner than later, in fact it has already started.

Personally, I am for a sensible practical interest rate of about 4% - 5% for a Fed Funds Rate.

Just Sayin' (Tongue in Cheek of course)

 

[ShokWaveRider]

Since I don't "invest" per se, I usually follow only the macro economic stories.

Can you please explain this? Are you all in Cash?

 

[imoldernu]

Can you please explain this? Are you all in Cash?

Oops.. sorry... no not in cash... I should have said not an active investor. Other than a few old solid stocks, which I don't even look at, I count my assets in our camp, a place in Florida and our home in Illinois. The rest is in a small annuity, Ibonds, bought between 2001 and 2003... and in MM IRA's and CD's.
We just don't have an appetite for risk, so likely leave some on the table in return for one less thing to think about.
We're just about at the point of beginning to spend down our assets... It's part our original plan when we started retirement, back in 1989, and we're on schedule.

When it comes to money, I'm kinda like the guy in the TV ad, who steps aside in line to let someone in... and that person wins the $50,000 special customer award. Not "lucky", but we sleep well at night.

 

[JOHNNIE36]

I am in the same boat with imoldernu. He and I are about the same age (77?) and we don't take lightly the risk at hand to lose money on iffy investments. I heard years ago that you should only invest what you can afford to lose without going back to work. Investments don't include CD's or anything else that's backed by the government. If I had to make an investment, it would be in real estate, like personal rental property. Something I can manage and farm out the maintenance myself because I won't and can't do it anymore physically.

I only mention that type investment because we had a large CD mature in February '13 and an even larger IRA CD maturing March '14. Without owing taxes on the IRA CD, it will have to go back into some lower interest IRA CD. This we will do if we have to because we don't need the interest to live on. Why take a chance. We'll stay with the low interest until rates pick up.

 

[ERD50]

I am in the same boat with imoldernu. He and I are about the same age (77?) and we don't take lightly the risk at hand to lose money on iffy investments. ...

That's fine, but even at 77 you have to think about inflation.

I put a 20 year time frame (so to age 97) into FIRECalc, and it shows 35%-40% equities to be the 'sweet spot' for portfolio survival. That allows you to take 4.7% WR from the portfolio with 100% success. A zero% equities would fail ~ 20% of the time.

To get 100% historical safety with zero equities for 20 years, you need to drop the WR to 3.67%.

If that lower WR works for you, and zero equities helps you sleep at night, then you've got a plan. But you've swapped 'market risk' for 'inflation risk'. You haven't actually reduced portfolio survival risk with zero equities, you've increased it. But again, if that works for you, then you've got your plan.

-ERD50

 

[Lsbcal]

Is this thread going to focus on anything actionable? "Watching interest rates" sounds as exciting as watching for my tap to drip.

I could post what happened to my intermediate bond funds in the last rate rise of 2004 through 2006. It helped me to convince myself to do nothing, stick with it. But maybe it wouldn't be worth the bother to put up the analysis . Let me know if anyone is interested.