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Interest Rate Rise

As the economy mends itself we may see a long overdue rise in interest rates. If you have been holding onto US bonds you may see their value drop with the rise in interest rates. You also may not be ready to commit your funds to more risky investments. Utility stocks have always been secure investments which yield dividends which are usually competitive with current interest rates.

The first goal of long term investment is not to lose your capital. The second goal is to keep up with inflation. The third goal is to increase your capital over the rate of inflation.

Thus, holding US bonds during a rise in interest rates will decrease your capital, assuming that you are not planning on holding the bonds to maturity. Hold US bonds at a lower interest rate and you may well lose ground to inflation. And, hold US bonds, worthless, paying a lower interest rate, and you will not increase your capital over the rate of inflation.

Today many are suggesting that one move out of US bonds into utility stocks, or various preferred dividend paying stocks. The rational is that as the economy improves the stock’s value will go up and the dividends of these companies, such as utility stocks, will reflect the current interest rate.

We have talked before about green investments the dividends of cheaper, more efficient energy production. Holding utility stocks is one way that one might invest in a cheaper, greener, more efficient future – with your utility stock appreciating in value and paying better dividends along the way.

An interest rate rise is never an assured thing. However, the Europeans and Asians are complaining about low US interest rates and a lower priced US dollar help the US in international trade. It is unlikely, after decades of currency manipulation by Japan, Taiwan, and, now, China, that the US will bend to demands not it its own interest. However, there is concern about a low interest rates could lead to inflation and a further decrease in the dollar’s value to the detriment of the USA. Many believe that an interest rate rise is a matter of when and not if.

The stock market has typically been where one wants a portion of ones money to beat inflation. However, the baby boom segment of society is getting to where conservative investments to protect capital are more important than growth stocks. Thus utility stocks, of US bonds once interest rates rise, are a wise move. Also, many are still hurting from the market collapse of a year ago and the near loss, for many, of a lifetime of saving and investing.

It would seem that last year’s lesson for aggressive investors has created more US bond buyers and, now, owners of utility stocks. Some talk about a new financial conservatism for America. In fact, there is evidence that the financial recovery will be a “W” shape as much of America’s money is now going into investing and saving and not into consumer spending.





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