Rising inflation allows a country’s central bank to adjust the interest rate upwards. Thus, in the US, the Federal Reserve uses the interest rate to try to control inflation. When inflation rises, the Fed increases its rate to discourage more borrowing. On the contrary, when a country is experiencing low economic activities, the government lowers the rate to encourage borrowing and stimulate economic activities.
When the interest rate hits the ceiling, a couple of things happen: borrowing becomes expensive, the dollar strengthens and deposits yield more. Also, a high-interest rate makes bond prices fall and so it provides investors with plenty of investment opportunities.
The Fed is charged with the responsibility of ensuring that moderate interest rates prevail. So it adjusts the rates to stabilize prices and promote maximum employment. Thus, rising interest rates are likely to affect investor’s portfolios. But to the investor, changes in interest rates bring forth numerous investment opportunities. Read on to see how interest rates impact stock markets where you can put your money when the interest rate rises.
Investing In Stocks
Although the interest rate will not affect the stocks directly, changes in the rates have a trickle-down effect that impacts the stock prices. For instance, high rates discourage borrowing and make companies halt expansions. It also reduces consumer spending and so slows down sales. Halting expansions and reduction in consumer spending lower the value of stocks. It becomes cheaper to invest in stocks.
As such, investing in stocks when the prices are low is likely to result in capital gain in the future when they rise. But before investing in specific stocks, you may need to consider the company’s pricing power. Also, check out how consistent the demand for its products and the type of products it manufactures
Investing in bonds
Bonds and interest rates have an inverse relationship. Notice that when the rate is high, the prices of bonds fall and vice versa. So when the interest rate rises, the government issues new bonds with a higher coupon. It makes coupons issued when interest rates are low worthless. But the yield on newly issued bonds increases as the rate rises. Thus, investing in bonds when the interest rate is high results in greater returns when the rates start falling.. Buying short-term bonds could be more beneficial.
Depositing the Money in Saving Accounts
As the interest rate rises, borrowing becomes dear. So banks make more money by lending out such deposits. And when they make more money, they become generous to depositors and pay them handsomely.
So anyone with idle cash can grow it by making deposits into saving accounts. Unfortunately, big banks pay so lowly, so it is essential to find a high-yield savings account. As a prudent investor, you should not stash your cash in big banks. Instead, shop around and consider saving in credit unions and online banks. The banks offer better rates because their goal is to attract deposits away from big banks. But before making the switch, check and ensure that the credit unions and online banks are federally insured.
Invest In Dollar-Denominated Assets
High-interest rates make investing in dollar-denominated assets attractive. The reason is that the dollar strengthens against other currencies when interest rates are high. It impacts foreign trade and reduces earnings. So investing in dollar-denominated assets becomes worthy since such grows in value as the dollar appreciates.
Real Estate Investment
Real estate prices and interest rates are linked. But the real estate income becomes less attractive as coupons on newly issued bonds rise. Besides, the price of real estate increases as rates increase. So investing in real estate assures higher returns.
Final Thoughts
Higher rates reign in borrowing and reduce the customer’s spending ability. It impacts companies that are debt-fuelled. Besides, higher rates make the capital acquisition and investment slow down. Also, higher rates make the stock prices fall and affordable to most investors. Also, a higher rate makes investing in bonds affordable resulting in more returns. But as interest rises, the stock prices decline. It provides an excellent opportunity to buy stocks at a reduced price. You may buy stocks and look forward to dividends at the end of the financial period or sell them later at a gain when prices start going up.
