Hey! Where are you going with that punch bowl?

The easy money spigot was officially turned off today by Federal Reserve Chairman Ben Bernanke and interest rates on U.S. Treasury notes and bonds soared in response.  I have advised my clients to do the following:

·        If you have any floating rate debt, convert it to fixed rate debt.

·        If you have any investments in fixed rate bonds, sell them and if you want to remain invested in the fixed income market, invest in a floating rate or variable rate bond fund.

·        If you have a large position in stocks with high dividends such as utilities, sell them.

·        If you have been on the fence and want to purchase a home you plan to live in for at least 10 years (not for investment), then get on with it and lock in your fixed rate, not variable rate mortgage, as soon as practical.

·        If you are a real estate investor or homeowner and have been thinking of selling your home, make haste.  As mortgage rates begin rising in earnest, the amount home buyers can offer for your home will decline.

At 2 pm ET the Federal Open Market Committee (FOMC) released its meeting minutes for the meeting held the past few days (see example photo below).  The committee makes key decisions about interest rates and the growth of the United States money supply.

File:Federal Open Market Committee Meeting.jpg

Interest rates had fallen to historic lows recently as the Federal Reserve (Fed) had orchestrated an easy or accommodative monetary policy in the spirit of helping stimulate the economy.  The Fed aimed to accomplish this via QE1 (quantitative easing), QE2 and Operation Twist.  In its most recent effort the Fed was buying $85 billion in treasury and mortgage securities from the marketplace and taking them onto their balance sheet.  In today’s headlines from the meeting, the Fed announced that “FOMC may moderate the pace of purchases later in 2013 and that the purchase reduction represents a FOMC consensus.”

Market participants interpreted this as the Fed being less accommodative for the first time in years and fearful of rising interest rates, they sold bonds sending interest rates soaring.  Effectively, they are taking away the punch bowl from the party where investors have enjoyed artificially low interest rates.  In response today, the 5 year U.S. Treasury (yield chart below) had its largest percentage daily increase in yield in its history, rising from 1.05% to 1.25%.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/06/20130619_fed3.jpg

The 10 year U.S. Treasury note rose in yield from 2.17% to 2.35%.  Expectations for higher interest rates in the future are a headwind for equities and the Dow Jones Industrial Average reacted by falling 206 points.  Comments from President Obama over the weekend that Ben Bernanke will be replaced next year added to the unease in the financial markets.

If you feel your financial well-being would be well served by timely commentary such as this, please contact me at mederchristine1526@gmail.com to schedule a free 30 minute consultation or tweet me at @christinemeder1.  #unrbrand

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

5 Responses to Hey! Where are you going with that punch bowl?

    • Hi Christine, I wanted to wait before replying to you to see how my forecast of rising interest rates panned out. Indeed, interest and mortgage rates have risen rather smartly. I appreciate your kind words and great job on your blog!

  1. josephvrusso says:

    Well done, Christine. I have Tweeted it out to my investment club. By the way, I intend to say “Executive MBA” when referencing the program. The “E” can be misconstrued as “Electronic” or some other deprecating leading word. Anyway, that was my decision following our discussion a couple of weeks back.

  2. Pingback: Guilty until proven innocent | Christine Meder's Accounting Advisory Blog

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