The upside of higher interest rates
Russell Price, Chief Economist – Ameriprise Financial
Dec. 18, 2023
Interest rates have jumped higher over the last few years, in some cases to levels not seen in many years. National average mortgage borrowing costs, for instance, are recently at levels not seen since the early 2000s.
Higher rates, understandably, have a bad reputation. But there is also an upside that doesn’t always get the attention it deserves.
Higher interest rates have a direct negative influence on equity market valuations and can hinder corporate profit performance in costing businesses more in interest expense. Higher rates also have a direct negative impact on bond market returns as the value of bonds moves inversely with yields. Of course, higher rates slow economic activity as they negatively affect borrowing, spending and investment.
Often overlooked, however, is the positive effect of higher rates on consumer income:
- Personal interest income: This is income from fixed income and cash investments with yields that generally move in tandem with Federal Reserve rates. (For example, high-interest savings accounts and money market funds.) As shown below, this income easily outstrips interest expense as households hold significantly greater financial assets than liabilities.
- Fixed-rate mortgages: Mortgages are by far the largest liability for households in aggregate. Yet more than 95% of U.S. mortgages are currently fixed rate, according to the Mortgage Bankers Association, thus protecting mortgagees from the rising rates.
Your financial advisor can help identify investment opportunities when rates are high
While interest rates are high, it’s worth considering whether you’d benefit from certain investment opportunities, such as certificates of deposit (CDs), investment certificates and Treasury bills. Your Ameriprise financial advisor will review how these investments may fit into your overall strategy, considering your risk tolerance, time horizon and the level of liquidity you need to feel comfortable and more secure in your current lifestyle.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities, accounts or strategies mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.
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