What Are You Wagering on Interest Rates?
- A gentleman’s disagreement
- What do you have riding on interest rates?
- Don’t buy this investment
What are you willing to bet on the likelihood that interest rates will stay low for the next year?
My supervisor raised this exact issue this morning. We were having a conversation about one of the investments we may recommend in an income newsletter we’ll be launching later this month.
I expressed concern about owning an income paying security that deals with interest rates. He replied, “I'd bet anything that interest rates in this country will probably NOT go up in 2011.”
Strong words for sure. If he’s right, this security will continue to pay solid 3.5% yields with the strong potential for capital gains.
If he’s wrong...well, the price of this investment could quickly and easily drop 50% or more. In light of the fact that this investment stands to benefit when interest rates drop, and that interest rates are already at rock-bottom levels, it seems like it might not be a good idea to buy it right now.
Interest rates can only go up from here.
In any event, my supervisor’s bet got me thinking: exactly what do I have riding on the notion that interest rates will stay low for the next year?
Admittedly, my wife and I own some Treasury bonds nearing maturity. Since they’re very close to maturity, their values won’t take too much of a hit in the event of an interest rate spike.
We also don’t have any adjustable rate debt. I don’t have a credit card, and Mrs. McElroy pays off her credit card balance every month.
We do have cash sitting in low-interest paying savings accounts - but not a huge amount.
All in all, I think we’re in pretty good shape when (not if) interest rates rise. But I know that many Americans aren’t prepared for higher interest rates. Many people carry large balances on credit cards with rates that could double or triple overnight. Some folks still have adjustable rate mortgages, which as we know could significantly raise their payments when interest rates rise.
And there are millions of people who own some form of Treasury debt. They might not own a Treasury bond directly, but maybe they own a mutual fund that owns Treasuries. Long term Treasuries are a dangerous place to park your money right now. I’ve been urging readers to get out of long-dated Treasuries for months. With the dollar rallying, there’s no better time to take profits.
I certainly wouldn’t bet anything that interest rates won’t rise in the coming year, but some folks are betting damn near everything.
My advice: keep your assets as liquid as possible. Make sure that your long-term finance plans don’t heavily depend on low interest rates. If you’re planning on buying or selling a home, do it while rates are cheap. High interest rates tend to drag on home prices.
I’m also (still) telling friends and family to join me in buying enough physical gold and silver to protect a small portion of wealth from dollar devaluation.
The point is: if you’re going to make a bet on interest rates, you probably shouldn’t bet that they’ll stay low. They’re going to rise. When they do rise, investors who bet wrong will get wiped out.
Right now there is no good reason to be sitting in long-dated, low-yielding bonds. Not when there are quality companies in safe sectors paying large dividends.
If you’re interested - my boss Ian Wyatt begin_of_the_skype_highlighting end_of_the_skype_highlighting begin_of_the_skype_highlighting end_of_the_skype_highlighting just completed a research report on a gold stock paying an 8.7% dividend. With gold prices reaching for new highs every month, this company’s profits are through the roof. Click here to read the full story.
Good investing,
Kevin McElroy
Editor
Resource Prospector
disclosure: long gold and silver
