Betting against falling interest rates in recent years has been
like betting against the tide rolling in. The fact is, though, that
eventually tides do change direction.
The legend of 11th-century King Canute says that he sought to
teach his overly flattering court the limitations of any man's
power. He sat on his throne at the water's edge, and commanded the
tide to stop. When it continued on to soak him and his throne, he
had made his point that only divine power can stop the tide.
Try as they might, customers in savings accounts, money market
accounts and other deposits have not been able to stop the tide of
falling interest rates in recent years. However, it might be useful
to know when that tide might be turning, and lately there have been
signals to that effect.
4 signs that interest rates might rise
Why now? After
interest rates have continued to fall
further than just about anyone thought possible, why might they
turn around and start rising now? Here are four signs that this
might be the time:
Mortgage rates broke their downward streak.
Thirty-year mortgage rates went six consecutive weeks without
rising, until rising at the beginning of August. One tick upward
in rates does not make for a new trend, but then again, every
change in trends does have a turning point.
Farmlands across the country have been devastated by a prolonged
drought. Failing crops lead to higher food prices. Higher food
prices lead to higher inflation, which in turn usually means
higher interest rates.
Food prices may be poised for a rise, but gas prices are already
on their way up, jumping by more than 8 percent in July. Like
food, gasoline is a critical component of inflation, and rising
energy costs have way of spilling over into the costs of many
goods and services.
A stronger job market.
It wasn't earth-shattering, but July's job creation was better
than the average for this year and last, and was contrary to the
weakening trend of recent months. Perhaps there's some life left
in the economy after all -- another sign that rising interest
rates may be ahead.
3 strategies to prepare for rising rates
If you believe interest rates are about to turn the corner, here
are three financial moves to make:
Hedge your long-term commitments.
It may not yet be time to abandon the higher rates of long-term
CDs for the greater liquidity of savings accounts, but at least
win yourself some flexibility by looking for CDs with relatively
mild penalties for early withdrawal.
Make your mortgage decisions soon.
Don't count on new
mortgage and refinance rates
remaining this low forever. If you are in position to make a
mortgage-related move, any delay might be risky.
Re-examine your asset allocation.
Falling interest rates create a tailwind for long-term assets
like stocks and bonds, so rising rates have just the opposite
effect. Savings accounts might outperform stocks and especially
bonds if rates start rising sharply.
King Canute proved that it doesn't pay to bet against the tide,
but like the tide, interest rates move in both directions. It might
be time to get ready for a change.