When interest rates start to rise, are you planning any portfolio changes?

[haha]

On the contrary. Foreign dollars mean US$ remitted abroad to pay for goods imported into the US. Those $$ have no place else to go so they are recycled back into US Treasuries.

I always find this assertion hard to understand. It may be correct, but I just can't see how. Say I am a Vietnamese factory owner. I ship my shirts, and Walmart pays me with dollars. It seems that I could join with others and buy ships, or oil storage depots, or natural gas fields with these dollars. Although someone would always be getting these dollars in these transactions, they do not have to go into long term US bonds. Perhaps very short term bonds, perhaps the heroin trade as working capital. True that the $$s would never be destroyed, but if the world truly lost confidence in them their value should approach zero.
If there were more eagerness to buy stuff, or even corporate stock than bonds, bonds should become relatively less expensive, and it should be harder to sell new issues.

Ha

 

[meierlde]

Note with the low interest rates the penalties for early withdrawal of CD's are quite low (like 6 months interest or less than 1%) from most banks a few have toughened the penalties recently however. If you can still get the old penalty, then it makes sense to go with a long term CD and if the rates go up 2-3% take the penalty as you will be ahead at the end of the day (and the penalty can be deducted against the interest recieved)

 

[Ed_The_Gypsy]

Maybe. I am thinking of getting rid of my bond funds (<5% of my assets) as interest rates can only go higher from here. Maybe put the money into Wellesley. (I know, they have bonds, too, but I won't have to think about it.)

I have lots of bonds within Wellesley and Target Retirement Funds in VG and Fidelity.

The only bond fund I'm invested in is a VG short term bond fund which should recover well enough for my needs in a rising interest environment.

The only individual bonds I hold are I-Bonds.

I-bonds

Interesting, Alan.

I also have Wellesley (thanks, Unc!) and a VG short-term bond fund.

I do not trust target funds. I can do that myself.

No I-bonds. I think I missed the boat on them.

 

[obgyn65]

No. I will keep my focus on CDs, municipal bonds, and cash.

Are you planning to make any changes now or in near future when the fed suggests they will raise short term interest rates?

 

[MichaelB]

I always find this assertion hard to understand. It may be correct, but I just can't see how. Say I am a Vietnamese factory owner. I ship my shirts, and Walmart pays me with dollars. It seems that I could join with others and buy ships, or oil storage depots, or natural gas fields with these dollars. Although someone would always be getting these dollars in these transactions, they do not have to go into long term US bonds. Perhaps very short term bonds, perhaps the heroin trade as working capital. True that the $$s would never be destroyed, but if the world truly lost confidence in them their value should approach zero.
If there were more eagerness to buy stuff, or even corporate stock than bonds, bonds should become relatively less expensive, and it should be harder to sell new issues.

Ha

Hello Ha

The reason the $$ used to import stuff end up back in US bonds is the Chinese factory owner has to exchange his $$ for local currency through the Central Bank. The exchange rate is fixed so the factory owners doesn't get as much money as he would like, and Gov't policies discourage consumption so he either saves or invests locally. The Central Bank cannot spend the money so it buys bonds, and because it intends to control the exchange rate, it is forced to buy mostly US$ denominated instruments.

If those exporters (China, Germany, Japan, OPEC) consumed more or allowed their exchange rates to rise and global trade imbalances might improve.

 

[Spanky]

I was about to lump some cash into a 5 year CD about a year ago that paid 3.75%. Then I thought what idiot would tie up their money for that. I know the answer to that question now.... Me. If I could go back in time!

Yes, only if we could roll back the time or travel into the future so that we can make a informed decision on investing and other matters.

 

[slazenger]

I dropped my intermediate (and longer) term bonds last week, and exchanged them for very short term treasuries. I decided to just keep my risk in my stock holdings, and not get too greedy chasing yield when the party stands a good chance of ending soon. I banked some nice gains on my TIPS and intermediate term corporates. The purpose of the treasuries will be primarily capital preservation, reduced volatility, and used to rebalanced my stock fluctuations.

 

[gerntz]

I would think one's AA would anticipate market changes, not react to them. I mean if you think interest rates are going to rise and thus likely hurt most investments other than short-term bonds/notes, why wouldn't you have allocated or moved there already? Continually reacting seems like a good way to keep your total return down.

 

[ripper1]

No.

+1

 

[ripper1]

The lowering of interest rates over the last 5-10 years created a GREAT period to be a bond investor. Are you planning to make any changes now or in near future when the fed suggests they will raise short term interest rates?

Don't just do something, Stand there.

 

[haha]

Hello Ha

The reason the $$ used to import stuff end up back in US bonds is the Chinese factory owner has to exchange his $$ for local currency through the Central Bank. The exchange rate is fixed so the factory owners doesn't get as much money as he would like, and Gov't policies discourage consumption so he either saves or invests locally. The Central Bank cannot spend the money so it buys bonds, and because it intends to control the exchange rate, it is forced to buy mostly US$ denominated instruments.

If those exporters (China, Germany, Japan, OPEC) consumed more or allowed their exchange rates to rise and global trade imbalances might improve.

Michael, can't the Chinese government use $$ to buy all the hard assets all around the world that they are buying? Steel for their pipelines and high rise buildings. Coal.

If George Soros could single-handedly break The Bank of England, surely the vastly wealthier Chinese government could upset the US bond market? In fact, the rate of US bond buying by the Chinese has varied widely from quarter to quarter. There must be something else they are doing when they are not buying.

Ha

 

[MichaelB]

Michael, can't the Chinese government use $$ to buy all the hard assets all around the world that they are buying? Steel for their pipelines and high rise buildings. Coal.

If George Soros could single-handedly break The Bank of England, surely the vastly wealthier Chinese government could upset the US bond market? In fact, the rate of US bond buying by the Chinese has varied widely from quarter to quarter. There must be something else they are doing when they are not buying.

Ha

That's what is happening.

China's central bank prints remembi and buys the $US from the exporter. The independent Central Bank, together with the central gov't, encourage savings by both limiting both consumer credit and the import of consumer goods. So the local currency is put in the bank at negative real rates, and the bank then lends that money to business for new industrial projects. They import lots of raw materials, which is why those prices have risen so much. It is also why there is so much inflationary pressure in China.

The Central Bank buys bonds directly from the US gov't and also in secondary markets, and in the short term transactions cannot be tracked. It looks irregular but it is not. Rest assured, however, that they will continue to buy US and Euro bonds as long as they have trade surplus with these regions.

China cannot afford to upset the bond market. If the US Treasury bond suddenly lost substantial value it could make China's Central Bank insolvent.

 

[Hamlet]

I think that that could change fairly quickly though. A lot can change in a decade.

A positive scenario--

The economy recovers. The Fed starts sopping up the liquidity that it has pumped into the market, removing a fair amount of the cash looking for safe harbors. People start investing their money in the next big thing (tech stocks/real estate/ green technology, tulip bulbs, etc). As these investments start increasing in value, people start demanding real interest in their cash accounts.

A negative scenario--

The Fed prints too much money and inflation kicks in hard. People flee to gold/guns/MRI's/Oil/collectibles in a desparate attempt to get the depreciating dollars out of their hands. Interest rates rise as people require greater returns to hold cash.

Real interest rates are negative right now. I don't think that will be the case indefinately.

We will not see "high" rates on savings and "safe" investments any time in the foreseeable future, IMO. Slightly higher? Maybe. But I think there's just WAY too much cash looking for safe harbors to expect "normal" interest rates any time this decade.

 

[Alan]

Maybe. I am thinking of getting rid of my bond funds (<5% of my assets) as interest rates can only go higher from here. Maybe put the money into Wellesley. (I know, they have bonds, too, but I won't have to think about it.)

I-bonds

Interesting, Alan.

I also have Wellesley (thanks, Unc!) and a VG short-term bond fund.

I do not trust target funds. I can do that myself.

No I-bonds. I think I missed the boat on them.

I lucked out on I-Bonds, buying most of them back when they had decent fixed rate components and when the limit was $30k / person / year. Part of the attraction at the time is that the accumulated interest is also tax-deferred.

I moved into Target Funds once I RE'ed for simplification so it is easy for DW, so she doesn't have to worry about re-balancing, and the VG 2010 fund reduced the number of funds from 4 to 1.

 

[freebird5825]

The lowering of interest rates over the last 5-10 years created a GREAT period to be a bond investor. Are you planning to make any changes now or in near future when the fed suggests they will raise short term interest rates?

I own VWALX, VMLTX, VWITX, and of course...psssst Wellsley.

Now that my school taxes are fully paid for the year, I recently reinstated DCA to VWITX for the purpose of overall bond MF diversification, not in response to anything in the market.
I still contribute to VMLTX.
No DCA to VWALX as I have already reached my target principal amount in that fund. No changes to VWINX are planned.

 

[GrayHare]

The question is not if the ~30-year bond bubble will burst but when. Ten-year Treasury rates under 2% are exploring uncharted waters.

 

[ziggy29]

The question is not if the ~30-year bond bubble will burst but when. Ten-year Treasury rates under 2% are exploring uncharted waters.

There's no way rates can remain this low forever, sure. But try as I might I see absolutely nothing in the visible horizon that would lead to a significant increase in rates. I don't see "safe" savings rates exceeding 1% any time in the next few years, for example.

 

[justplainbll]

The question is not if the ~30-year bond bubble will burst but when. Ten-year Treasury rates under 2% are exploring uncharted waters.

October's 7 year T-note had a coupon of 1.75%, November's 7 year T-note coupon is down to 1.375%.

 

[Chuckanut]

I lucked out on I-Bonds, buying most of them back when they had decent fixed rate components and when the limit was $30k / person / year.

Reminds me of my first mortgage: A variable rate of 1.6% over the one year T-bill rate. Oh, How I wish I still had that loan!!!

 

[Mulligan]

October's 7 year T-note had a coupon of 1.75%, November's 7 year T-note coupon is down to 1.375%.

Makes me think of all the investing saavy people on this forum that bought I Bonds back when they had a 3% fixed plus inflation. Who would have ever thought those returns would stomp the 7, 10, or even 30 year note? Better watch out congress will pass some law converting those fixed rate I Bonds into 7 year notes as part of the "deficit reduction package" the super committee punted on

 

[justplainbll]

Makes me think of all the investing saavy people on this forum that bought I Bonds back when they had a 3% fixed plus inflation. Who would have ever thought those returns would stomp the 7, 10, or even 30 year note? Better watch out congress will pass some law converting those fixed rate I Bonds into 7 year notes as part of the "deficit reduction package" the super committee punted on

The 3.375% of 04/15/2032 sure not too looking too bad with a value of 198 after originally purchasing it 9 1/2+ years ago at par.