In a rising interest rate environment what asset classes and funds might do well?
I'm going with these three. 1) Convertibles ... my holding is FISCX (ytd +5.66%). 2) Commodities ... my holding is PCLAX (ytd+5.20%). 3) Bank Stocks ... my pick is FRBAX (ytd+3.00%).
What might your three holdings and/or picks be (asset class along with fund pick)? Who will take gold & precious metals? How about commodity producers? Miners? Energy? Natural Resources? Etc?
Comments
The questions: If the economy is doing so well, why are rates not naturally higher? Is borrowing demand full up at the corporate level? Shouldn't rates be at least 1% higher, but that there remains so much demand for U.S. gov't. issues that the rates remain low? Is the Fed. attempting to gain some breathing room to lower rates in the future, if there are problems in the financial system? Higher rates would likely cause some problems with lending for mortgages and auto loans, etc., yes? I'm trying to imagine how many folks have no idea of what loan rates where 10 years ago. How long will it take to wean many off of the "low rate tit"?
Well, you get my drift.
I have more questions than answers and they are only based upon my non-economic degree.
Our house,at this time, does not intend to purposefully engage in investments that may benefit from interest rate increases.
K. I'm out of thinking juice for this morning.
Take care,
Catch
Chart 1, May, 2006-May, 2010.......July 9, 2007 = yields packed together, the below list is + or - a few basis points at the worse; still packed tight
---30 yr yield = 5.10%
---10 yr yield = 5.03%
--- 5 yr yield = 4.93%
--- 1 yr yield = 5.03%
http://stockcharts.com/freecharts/perf.php?$UST30Y,$UST10Y,$UST5Y,$UST1Y&l=1843&r=2830&O=011000
Chart 2, Yield overview Jan., 1999-April 16, 2018
http://stockcharts.com/freecharts/perf.php?$UST30Y,$UST10Y,$UST5Y,$UST1Y&p=6&O=011000
Yields as of April 16, 2018
---30 yr yield = 3.03%
---10 yr yield = 2.83%
--- 5 yr yield = 2.69%
--- 1 yr yield = 2.12%
Some would say to stick with a good low cost equity fund. That’s your best inflation hedge. However, if you’re really worried and don’t mind the potential underperformance,T. Rowe Price bills it’s long established PRNEX as an inflation hedge - but they caution that’s it’s highly cyclical and likely to underperform during economic downturns / recessions.
About 9% of my Core portfolio is considered “inflation hedge”. That portion consists of 4 funds which seem to work well together to even-out the swings. Generally, at least one of the 4 will have an “up day” when the others decline. Other than Prices’s PRAFX (the most diversified), I won’t bother to name them. The other 3 consist of a gold fund, an infrastructure fund and a real estate fund. A similar amount is held in a global bond fund - the thinking being that if the dollar weakens, as it is apt to do during inflationary periods, foreign bonds should outperform domestic. (But if the foreign/global bond fund is “hedged” against currency risk, its outperformance would be less.)
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BTW - The cost of a phone booth seems to have skyrocketed recently!
A short read about rates........from to be in June, NY FED Williams
https://www.bloomberg.com/news/articles/2018-04-17/fed-s-williams-says-inverted-yield-curve-powerful-recession-sign
10-30 year narrowed a bit more today to .18 basis points 2.82/3.00 yield
https://www.wouldyoubelieve.com/graphics/cone_title.gif
What? Say that again, Chief? What?
I understand U.S. Grant's admin. was dogged by corruption and craziness. No phone booths back then, I guess. Is the Trumpster going to outdo them ALL? Probably already.
Thank you for the link ... short read on interest rates.
It appears that the tighenting of the yield cure presently is having an effect on most bank stock valuations as spreads narrow. If things go as anticipated (by the Fed) the long end of the yield cure should, in time, move upward with the short end as the FOMC raises interest rates at a measured pace. If not then things will generally not go well for us and perhaps a recession will be forthcoming. Currently, this has thrown cold water on my option three (bank stocks). However, I see option one (convertibles) continue upward as well as my option two (commodities). The Fed is having to print money to fund the government since it is short on tax receipts. This drives down the value of the dollar making the commodity play attractive, by my thinking. And, for convertibles, this is a soft play on the rising stock market. Generally, convertibles have a bond like floor and an equity like ceiling.
It will be interesting, for me, to see how my three interest rate options plays pan out as we move through the year. Currrently, the one I am most concerned about is bank stocks. If things materialize as the article states and as the Fed anticipates then bank stocks should come around as the long end of the yield curve rise and the yield spread increases.
If there is one thing I have learned in investing, through the years, everything does not work as planned. With this, I remain flexabile to make adjustments as I feel warranted. Since, the April 11th market close Old_Skeet's market barometer has moved from a reading of 158 indicating the S&P 500 Index was undervalued to the 17th close with a reading of 152 indicating the Index is now at fair value. We still have a ways to go on the barometer's scale to get to overvalued ... but, the way the market has moved upward the past few days it might not take long to get there.
Thanks again for making post.
Old_Skeet
Good timing on your choice of topics ... Commodities are having their best day in a long time. Industrial metals hot. Gold has punched through $1350 after flirting with it for a couple months. And, do you believe Brent Crude is nearing $73?
Now that I’ve successfully jinxed the markets, look for all this stuff to finish lower by day’s end.
@hank- Based on the fast-rising numbers on the gasoline pumps, I have no problem at all believing that. Got to hand it to OPEC & Russia- they've done it again. Venezuela being all but offline, and slowdown in US fracking output isn't helping either. Bastards. I'm guessing stabilization at $75/$80 bbl.
With respect to the slowdown in fracking output, an article in the WSJ suggests that "Pipeline capacity is emerging as a problem. Oil is starting to back up in West Texas and has recently sold at a $6 to $9 discount to crude prices elsewhere in the U.S. That is a warning sign that some oil might have to travel by more expensive ways like trucks to market and that producers could be forced to take drastic measures like halt drilling.".
Going to be interesting to see how long this takes to impact inflation and consumer spending, particularly on the now (all but) mandatory extra large SUVs and pick-ups.
Some folks warn against commodities, which do well in inflationary periods, which is what rising interest rates are designed to quell.
For what that's worth,
David