Central banks in developing countries are beginning to raise interest rates to curb inflation. It’s only a matter of time before interest rates in the United States are raised as well. How will that affect exchange traded funds (ETFs)? Depending on the fund, higher rates will spell either good or bad news.
Mary Anne and Pam Aden of MoneyShow.com report that the 30-year T-bond yield crossed the 4.65-4.75 percent mega-trend threshold this month. According to their analysis, once the yield crosses the mega-trend threshold, interest rates continue in the corresponding up or down direction for at least the next decade.
With higher yields, Mary Anne and Pam warn that:
- Inflation will start to pick up momentum, making metal markets more attractive.
- Bond prices will begin a steady decline because of higher yields and inflation.
- Investors will begin to shift their money out of the stock market to higher-yielding fixed-income investments.
- The dollar will suffer as the burden of debt becomes more painful with higher rates.
HSBC Private Bank doesn’t think the above will for at least the next six months, reports Lilian Karunungan of BusinessWeek. That’s why they are shifting money out of emerging markets and into developing ones. At least for the short-term, HSBC believes that higher rates in developing countries, particularly Asia, will put a damper on returns. This view is in contrast with the view of PIMCO, manager of the world’s largest bond fund, which believes that higher taxation and regulation in developed markets will be a greater negative factor than higher rates in emerging markets.
Regardless, we know that bond prices and yields move in opposite directions. So keep a close eye on when and how fast the U.S. tightens up its fiscal policy.
For more stories on interest rates, visit our Treasury Bonds category.
- SPDR Gold Shares (NYSEArca: GLD): Metal markets may look more attractive with higher interest rates.
- iShares Barclays 7-10 Year Treasury (NYSEArca: IEF): Bond prices will fall as interest rates rise; long-term bonds will be hit hardest.
- iShares S&P 500 Index (NYSEArca: IVV): The broader market may feel downward pressure as interest rates rise.
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.