What I'm Tracking Now--Interest Rates

I'm keeping my eye on interest rates. If they appear to be going up, we may need to adjust the bond portion of our portfolios, potentially rapidly and significantly.

Remember, bond prices drop when interest rates rise. Imagine fleeing the stock market for the bond market in order to preserve your nest egg, as millions of investors have done with zillions of dollars in recent years, only to have the nest egg reduced by bond prices dropping if/when interest rates rise? Pretty awful scenario, but also not unlikely to happen.

To defend against this "hurt even though I sought shelter" potential, we need to anticipate the interest rate moves.

If the Fed changes its language vis a vis fed funds rate, basically from the current "low for an extended period of time" to something like "for a while longer", that will have my attention.

If the newly-issued US Treasury bonds don't sell as much or as quickly at auction, indicating we might need to offer higher interest rates in order to "move the product", that will have my attention.

The Fed is unlikely to raise rates proactively until the economy is growing enough for inflation to become a concern. But rates may rise in the auction markets anyway, if our bond buyers (like China) determine that investing in the USA is more risky than usual. You see, they'll demand more for their investment, and we'll have to offer higher rates.

Either scenario will do damage to the net worth and account balances of investors positioned in the wrong kind of bonds or bond funds.

I seek to protect clients by keeping eye on what might cause the fire, not just by looking for clouds of smoke.