How to take advantage of rising interest rates

While the US economy continues to operate in a relatively low interest rate environment, it will not last long. The central bank is expected to raise interest rates several times in the months ahead, although it is not clear how much.

“Inflation is the hub of the wheel and will dictate how much and how often the Fed needs to raise interest rates,” said Greg McBride, a financial analyst at

Credit card: Minimize the bite

When the fed funds interest rate – also known as the overnight bank’s lending rate – rises, It will push up various lending rates that banks offer their customers. So you can expect to see an increase in credit card prices within a few statements, McBride said.

If you have a balance on your credit cards ̵[ads1]1; which usually have high variable interest rates – consider transferring them to a zero-interest balance transfer card that locks a zero interest rate for between 12 and 21 months.

“It isolates you from interest rate hikes over the next year and a half, and it gives you a clear runway to pay off your debt once and for all,” McBride said. “Less debt and more savings will enable you to better withstand rising interest rates, and are especially valuable if the economy is souring.”

If you do not transfer to a zero-interest balance card, another option may be to get a relatively low fixed-rate private loan.

Regardless, the best advice is to do everything possible to pay down your balances quickly.

Mortgages: Lock in fixed interest rates now

Mortgage rates have risen over the past year. And it will probably continue.

“Mortgage rates have jumped two full percentage points since the beginning of the year, from 3.27% to 5.28%,” McBride noted.

If you are in the process of buying a home or refinancing one, lock in the lowest fixed rate available to you as soon as possible.

That said, “do not jump into a big purchase that is not right for you just because interest rates can go up up. “Hurrying into the purchase of a large ticket item such as a house or a car that does not fit into your budget is a recipe for trouble, regardless of what interest rates do in the future,” said Texas-based certified financial planner Lacy Rogers.

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If you already have a variable rate loan facility, and you used part of it to do a home improvement project, McBride recommends asking your lender if they would be willing to set the interest rate on your outstanding balance, and effectively create a fixed rate mortgage. Let’s say you have a credit limit of $ 50,000, but only spent $ 20,000 on a renovation.

If this is not possible, consider paying down that balance by taking out a HELOC with another lender at a lower promotional price, McBride suggested.

Bank savings: Shop around

If you have hidden money in big banks that have paid almost nothing in interest on savings accounts, do not expect it to change just because the Fed raises interest rates, McBride said. This is because the big banks are swimming in deposits and do not have to worry about attracting new customers.

But online banks, which want to keep current accounts and attract more business, offer far better rates and actively increase them as reference rates rise. So it’s worth shopping around.

Shares: Consider pricing power

When deciding whether to invest in a company or sector that can do well in an environment of rising rates – especially an environment of inflation driven by a strong economy, as well as supply chain disruptions and rising commodity prices, you should consider, “which companies will have pricing power in an inflationary environment?” said Michael Stritch, chief investment officer at BMO Wealth Management.
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Financial service companies, such as banks, usually do well in environments with rising rates because, among other things, they make more money on loans. Insurance companies can also thrive, in part because the return on the securities they have in the portfolio goes up.

Normally, Property can be damaged by rising prices. But since the 10-year government interest rate, which drives mortgage rates, has already risen sharply in the past year, it may not jump sharply from where it is, Stritch said.

Given that there may also be a period of sustained inflation this year, a certain exposure to real estate via Real Estate Investment Trusts can offer good income and growth potential if the underlying companies increase their income through rising rents, hotel room prices and the like.

Technology companies also do not usually benefit from higher prices. But given that cloud and software vendors issue subscription prices to customers, they could rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

Bonds: Go short

To the extent that you already own bonds, the prices of your bonds will fall in a rising interest rate environment. However, if you are in the market to buy bonds, you will benefit from that trend, especially if they are short-term bonds, since prices have fallen more than usual compared to long-term bonds. Normally, they move lower in tandem.

– It is a pretty good opportunity short-term bonds, which are severely shifted, “said Flynn.

Given today’s high inflation rates, Series I savings bonds can be attractive because they are designed to preserve the purchasing power of your money. They are currently paying 9.62%. However, that rate will only be in effect for six months and only if you purchase an I-Bond by the end of October, after which the rate is scheduled to adjust. If inflation falls, the interest rate on the I-Bond will also fall.

There are some limitations. You can only invest $ 10,000 a year. You can not redeem it in the first year. And if you pay between years two and five, you lose the previous three months with interest.

“In other words, I-Bonds are not a replacement for your savings account,” McBride said.

Still, they retain the purchasing power of $ 10,000 if you do not have to touch it for at least five years, and it is nothing. They can also be of particular benefit to people planning to retire within the next 5 to 10 years, as they will serve as a safe annual investment they can make use of when needed in the first years of retirement.

Other assets that can do well are so-called instruments with floating interest rates from companies that need to raise money, Flynn said. The floating interest rate is linked to a short-term reference rate, such as the Fed funds rate, so it will rise each time the Fed raises interest rates.

But if you are not a bond expert, it is better to invest in a fund that specializes in getting the most out of a rising interest rate environment through floating rate instruments and other bond income strategies. Flynn recommends looking for an equity fund or ETF with strategic income or flexible income, which will include a number of different types of bonds.

“I do not see many of these choices in 401 (k) s,” he said. However, you can always ask your 401 (k) provider to include the option in your employer’s plan.

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