Roberts Nash Advisory Group

Higher Interest Rates Are Here – Did You Notice?

During January the 30 year US Treasury Bond fell 4.3% (according to Bank of America Merrill Lynch).  Remember the Fed is buying bonds in the market.  On January 30th Reuters wrote, “The Federal Reserve on Wednesday left in place its monthly $85 billion bond-buying stimulus plan, arguing the support was needed to lower unemployment even as it indicated a recent stall in U.S. economic growth was likely temporary.”  So even with the Fed purchases bond markets fell (Interest rates rose). 

What is the reason the bond prices fell?  Is it a sign of things to come?  Certainly the size of the US Debt is a problem in a slow growth environment.  The deficit is projected to fall to $854 Billion this year after being over $1 Trillion for the past 4 years.  But that still leaves $17.4-trillion U.S. debt, equating to more than 109.3 % of GDP if we assume GDP of $15.8 trillion. (Source: Federal Reserve Bank of St. Louis)  Is the bond market finally waking up to the reduced credit quality of the US?  If so investment markets could have a rocky road in 2013. 

Mal Spooner said in his recent blog – Rising i-rates: More than bonds will get hammered, “Those rushing into stocks today run serious risks.   Stocks have 'durations' also, meaning that if the bond market gets hammered, stocks will be hurt as well.  Sensitivity to interest rates depends on a number of factors....dividend yield, financial structure, industry sector and so forth.  Some stocks will fare better than others.”

We are particularly concerned about high dividend stocks as they appear to be overpriced today.  Stocks with lower yields but growing dividends seem to provide better value.   Rising interest rates will eventually cause a stock market sell off but we all know stock markets can continue to rise higher and far longer than many expect (myself included).  Right now the thought is “Where else do you put your money?”  Maintain equity exposure in the lower end of your target and look at a dip in the market as an opportunity to accumulate.  After a 4 year bull market that has moved 128% as measured by the S&P 500, this is not the time to get aggressively bullish.  Stock market optimism is far too high, corporate insiders are net sellers of stock, corporate earnings growth has slowed to a snail’s pace, and we had negative GDP in the U.S. in the last quarter of 2012.

Also of note, “UBS is planning a mass mailing to many of its brokerage clients alerting them that they have been reclassified as ‘aggressive’ investors following a recent change in its bond market outlook ….. those investors who believed they had constructed a ‘conservative’ portfolio by being heavily invested in bonds could be reclassified as ‘aggressive.’”  Click here to read the full article.     

Although interest rates have moved slightly higher on long term bonds, there is no clear change of trend yet.   We must be aware that interest rates will go higher at some point in the future.  We must understand how this change is likely to affect our portfolios and prepare accordingly.

** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **

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