How to invest as interest rates rise

3:00 PM interest, invest, rates No Comments

| By Joe Light, The Wall Street Journal

As the Fed starts to lift its foot off the gas pedal, it may be time to ditch beloved, high-income sectors such as utilities and telecommunications in favor of stocks that can better ride the economic recovery.

Janet Yellen, right, has been approved by the Senate and will succeed Ben Bernanke as Federal Reserve chair Feb. 1.

And so a new era begins.

As interest rates rise, investors need to take a hard look at portfolios that were designed to hold up when yields were on the decline and safety was in high demand.

It may be time to ditch beloved high-income sectors, such as utilities and telecommunications, in favor of those in which companies can increase earnings more quickly as the economy picks up steam. Commodities, which often suffer as interest rates rise, will be a tricky bet. Home values haven't been as hurt by higher mortgage rates as you might expect.

In fixed income, investors should stay away from Treasurys and mortgage bonds -- the securities most directly affected by the end of the Federal Reserve asset-buying program designed to juice the economy -- and look for deals among municipal bonds that have been punished by default fears. Resist the temptation to load up on short-term debt.

Interest rates have been heading steadily down for more than three decades, but last year the rate on the benchmark 10-year Treasury climbed 1.27 percentage points to 3.03 percent, ending a three-year streak of declines and prompting investors such as Pacific Investment Management Co.'s Bill Gross to predict that the long bull market for bonds has ended. The rise in rates stuck investors in funds that track the Barclays U.S. Aggregate Bond Index with their first loss since 1999 -- albeit one of only 2 percent.

It's important not to overreact. "Some investors have concluded that there's a 30-year bear market in front of us," says Kathy Jones, vice president and fixed-income strategist at the Schwab Center for Financial Research, a division of San Francisco-based brokerage Charles Schwab (SCHW). "It's more likely that we just see a small, gradual rise in rates."

It is possible that interest rates won't rise much further than they have already. Since 2000, 10-year Treasury yields have tended to settle about 0.7 percentage point below economic growth before adjusting for inflation, Jones says.

At current growth levels, that suggests the natural rate for Treasurys would be somewhere between 3 and 3.5 percent -- not much higher than it is now.

There also isn't any rule that bond rates can't stay low for prolonged periods. Japanese 10-year government bonds have had a yield of less than 3 percent for well over a decade.

As bond rates dropped between 2010 and 2013, yield-hungry investors snapped up anything that could give them more income, including stocks of utility and telecommunications companies and real-estate investment trusts.

Yet in 2013, those stocks performed the worst relative to the broad market. A typical S&P 500 ($INX) exchange-traded fund rose 32 percent in 2013. But the Utilities Select Sector SPDR (XLU) climbed just 13 percent. The iShares Global Telecom ETF (IXP) gained 24 percent.

This year, if rates continue to rise, investors should expect these sectors to continue to underperform, says Alec Young, global equity strategist at S&P Capital IQ.

"The question is: How big a deal was the yield when someone bought one of these stocks?" Young says. Those stocks will continue to perform poorly, he says.

Investors should lean toward economically sensitive sectors, such as consumer-discretionary companies -- which sell items such as automobiles -- energy and financial stocks.

Those last three sectors have the added advantage of being relatively cheap. As of Jan. 3, the price-to-earnings ratio of the S&P 500, based on the past 12 months of earnings, is about 16.7, according to FactSet, compared with P/Es of 16, 13.9 and 14.2 for consumer discretionary, energy and financials, respectively.

It is easy to get exposure to such sectors with ETFs such as the Vanguard Energy ETF (VDE), which charges annual fees of 0.14 percent, or $14 per $10,000 invested. The Vanguard Consumer Discretionary ETF (VCR) costs 0.14 percent, while the Financial Select Sector SPDR (XLF) costs 0.18 percent.

Emerging-market stocks and bonds might have a lot to lose as the Fed unwinds its stimulus programs and, eventually, starts to raise short-term interest rates, says Ed Yardeni, president of Yardeni Research, an investment-strategy consultancy in Brookville, N.Y.

Many investors looked to emerging markets for income. If U.S. bonds, which are much less risky, start offering higher yields, Yardeni expects that investors will move back in that direction.

Research from Harvard Kennedy School of Government professor Jeffrey Frankel has found that commodities also tend to suffer when inflation-adjusted interest rates rise.

That is because as rates rise, the incentive to extract and the cost of storing commodities also goes up, and investors look for better returns elsewhere, Frankel says.

To be sure, though commodity prices historically have suffered when intermediate and long-term rates rise, they are more affected when short-term rates climb, he says, something that might not happen for years.

"It's quite possible that after 30 years of a downward trend in interest rates, we could see them move upward in coming years and that could result in sending real commodity prices down," he says.

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Why credit card rates didn't fall along with mortgage rates

7:00 AM along, Credit, didnt, mortgage, rates No Comments

| By Mitch Lipka, MSN Money

To put it simply, credit card lenders have much more to lose when borrowers default on debt.

Since the financial crisis of 2008, interest rates have fallen sharply for all kinds of financial products: mortgages, savings accounts and corporate bonds, just to name a few. Yet as the Federal Reserve has held rates at unprecedented low levels, one type of loan rate has been seemingly impervious to change: Credit cards.

"The rates on credit cards remain stubbornly high because they should be higher," said Daniel Ray, editor-in-chief of CreditCards.com. "They'll never fall to the levels that mortgage rates enjoy, and they shouldn't."

At the same time mortgages were hovering in the mid 4% range, credit cards interest rates were averaging close to 15%. It might not seem like it makes much sense for the rate on one type of loan to plunge while the other doesn't, but credit card experts explain there are quite a few reasons, starting with the most fundamental.

A mortgage -- and a car loan -- are secured by property. Fail to make your payments and the lender can repossess the home or car and sell it to recoup some, or all, of its losses. Fail to pay your credit card and the bank can put you in collection, but taking back its card isn't going to pay their bills. That means the lender is taking on a much greater risk, particularly when you consider that some credit card limits can be more than what many people pay for their cars.

"Lenders always feel more comfortable with secured loans, but the recession helped boost the spread," Ray said. "Today's mortgages are, on average, about 10 percentage points less expensive than the average credit card loan, and even with recent increases in mortgage rates, that 'spread' is still near a record size. One big reason is that the Federal Reserve stepped in after the recession to prop up the home-lending industry. It offered no such rate-tamping help to the credit card industry."

It is possible to find a lower interest rate credit card if you're among those who have the best credit scores. But, for the most part, they'll be nothing like the rates people get for their mortgages or car loans.

The credit card industry also has to factor in a considerable amount of fraud it must contend with and balancing its losses by taking on a broad spectrum of consumers against the rates it charges to its best customers. In addition, consumer protections put in place by the Credit Card Act of 2009, which took away some of the freedom card issuers had to assess fees, forced an increase in interest rates immediately before the law took effect.

While higher rates are with us those reasons, you'll still see plenty of teaser rates of 0% -- of course you can't get lower than that -- but they are introductory offers that typically expire in 6-18 months and then convert to something typically north of 10%.

"The lowest rate I've seen on a card --other than the promotional rates of 0% -- is 5% on the Speedway SuperAmerica Credit Card," said Bill Hardepkopf, CEO of LowCards.com.

But, for the most part, cards considered low interest hover in the 10%-12% range. A few dip below, such as the Barclaycard Ring Mastercard, which has been offering an 8% rate, according to LowCards.com.

The credit card business is highly competitive, Hardekopf said, allowing consumers -- particularly those with the best credit -- to shop around to find a combination of features that suit them best. That could include a low interest rate, rewards or other perks.

Just don't expect your credit card rate and mortgage rate to match.

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Fed holds rates at record lows, notes some improvement in economy

4:30 AM economy, holds, improvement, notes, rates, record No Comments

The U.S. Federal Reserve on Wednesday repeated its promise to leave interest rates on hold until at least late 2014 but offered few clues into whether it might offer additional stimulus later this year.

The Fed described the economy as expanding moderately, just as it did in March, and said the unemployment rate had declined but remains elevated.

Officials noted a pick up in inflation but said it was largely attributable to energy cost hikes that will affect price growth only temporarily.

Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the central bank said in its policy statement.

Richmond Fed President Jeffrey Lacker again dissented against the decision, saying he believed rates would need to be raised before that time frame.

Full text of the Fed's statement here.

As Fed officials gathered on Wednesday, the government reported that orders for long-lasting manufactured goods plunged 4.2 percent in March, the biggest drop since the economy was nose-diving in early 2009.

The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.

Investors wishing for clues about how the central bank views the June end-date of Operation Twist, its latest effort to keep down long-term rates, were disappointed.

U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed purchases of government or mortgage bonds. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but is seen slowing to around a 2.5 percent pace in the first three months of this year.

The Fed will release its latest round of quarterly forecasts at 2 p.m. and Fed Chairman Ben Bernanke will follow with a news conference at 2:15 p.m., where he will likely be peppered with questions on the chances of more easing.

Most analysts think Bernanke will do whatever he can to keep his options open.

Since the central bank's last round of GDP, unemployment and inflation forecasts in January, the U.S. jobless rate has come down to 8.2 percent from 8.5 percent, and the financial situation in Europe has stabilized somewhat, although it is still troubling.

In January, the Fed saw the economy growing between 2.2 percent and 2.7 percent. That range may be revised a bit higher. At the same time, the unemployment rate forecast will likely shift down from January's 8.2 percent to 8.5 percent range.

Policymakers will also offer individual projections for when the first interest rate increase should come and how quickly borrowing costs should rise -- though these will appear on charts that do not link them to specific officials' names.

Traders are currently betting the Fed will begin raising rates in April 2014, with short-term U.S. futures contracts suggesting they see a 56 percent chance of a rate hike then.

In response to the deepest recession in generations, the Fed lowered benchmark overnight rates effectively to zero in December 2008 and more than tripled its balance sheet by purchasing some $2.3 trillion in government and mortgage bonds to keep long-term borrowing costs down.

According to a Reuters poll published last week, economists have dialed down expectations for a third round of bond purchases. The respondents saw a 30 percent chance of more bond buys, down from 33 percent in a poll in March.

A report early this month that showed job growth slowed sharply in March kept some hope of easing alive, and economists will look eagerly to the next round of jobs data on May 4 for more clues on where U.S. monetary policy may be heading.

Copyright 2011 Thomson Reuters.

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Fed sees economy growing modestly, leaves rates unchanged

10:44 AM economy, growing, leaves, modestly, rates, unchanged No Comments

Federal Reserve Chairman Ben Bernanke and his central banking colleagues left interest rates unchanged at historic lows Tuesday and said they see the economy growing modestly with the jobs picture improving.

"Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated," the Fed's Open Market Committee said in a statement after its regular meeting to discuss economic conditions.

The Fed also said it sees continued advances in household spending and investment by businesses. Despite the upbeat tone, the Fed gave no hints of any change in monetary policy and reiterated it would keep rates low until at least through late 2014.

It warned that global financial markets still posed considerable risks for the economy. "Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook," the Fed statement said.

The Fed said a recent spike in energy costs would likely push up inflation but only in the short run. Richmond Fed President Jeffrey Lacker again dissented from the decision. The statement said Lacker does not see the need for exceptionally low rates through 2014.

A report on Tuesday showed retail sales posted their largest gain in five months in February, the latest data to suggest the economic recovery is on a more solid footing.

Even so, Fed officials are uncertain whether the progress reducing unemployment can be maintained given still-sluggish economic growth, and many analysts believe the central bank will launch another round of bond buying later in the year.

In a poll Friday of firms that trade directly with the Fed, 14 of 18 economists anticipated further "quantitative easing," the Fed's latest mechanism to get more cash into the economy. That survey was taken after the government said the economy created more than 200,000 jobs for the third month running in February.

The Fed cut overnight interest rates to near zero in December 2008 and has bought $2.3 trillion in bonds to boost growth. It repeated Tuesday that it was likely to hold rates at rock-bottom levels at least through late 2014 and that it would continue to rebalance its portfolio to pull down longer-term interest rates, a program that ends in June.

Analysts are looking to the Fed's two-day meetings in April and June for decisions about any new directions for policy. After both meeting, Bernanke will hold a news conference and officials will make public updated economic and interest rate projections.

Most economists think the economy will expand at a modest rate of about 2 percent in the current quarter. Bernanke said in January it would normally take a growth pace of between 2 and 2.5 percent just to hold the jobless rate steady.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high at 8.3 percent officially.

The Fed has downplayed any worries about inflation in recent months, saying it expects sluggish growth to hold price pressures in check. Officials said they expect inflation to run at or below the central bank's 2 percent target in coming quarters.

However, oil prices have been climbing in reaction to tensions over Iran's nuclear program. U.S. gasoline prices jumped in January, and even core consumer prices, which strip out volatile food and energy costs, rose by 2.3 percent over 12 months, the fastest pace in more than two years.

Rising concerns about inflation would weaken any argument at the Fed in favor of easing financial conditions further.

Reuters contributed to this report.

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Fed can tip his hand prior to the rise in interest rates

1:38 AM interest, prior, rates No Comments

WASHINGTON-the Federal Reserve, begins in a movement that back expectations could push as close to zero U.S. interest rates rise, their makers publish forecasts for borrowing costs.

The step is transparency an important milestone in Fed Chairman Ben Bernanke push for policy making, and it might be a bit more of a lift of better align financial market bets with the main view from the Central Bank offer of the economy.

The Fed had the overnight federal funds rate close to zero since December 2008 and bought $2.3 trillion in bonds in further efforts to stimulate growth. In statements after his last four political hit, she said it expected to keep ultra low prices until at least mid 2013.

But officials have in the calendar, King on a promise, and was linked statically. Fed Vice Chair Janet Yellen has pointed out, that it no longer U.S. Central Bank thinking covered that.

Meet in minutes from its Dec. 13, published on Tuesday open market Committee said federal policy setting that price projections publish it 24-25 along with its regular quarterly economic forecasts after its next meeting on Jan.

There are also, that contained on the first rate hike.

"This step is performed by the Bernanke fed and interest rate his policy conventional in the most permanent change in how the FOMC probably the greatest increase in the transparency, leads may represent", said Michael Feroli, an economist at JPMorgan in New York.

Long-term interest rates, such as through bonds and mortgages, include expectations for short-term rates the Fed controls. Compelling financial markets that it to keep will last longer than they already expect prices, the Fed could pull through longer-term prices lower.

Michael Cloherty, head of the US interest rate strategy at RBC capital markets in New York, said that he expected that the new forecasts would show that the majority of the Fed politician did not expect the next rate hike until 2014.

The minutes showed, however, that an active debate the Fed of its easy monetary policy stance was still involved in.

"A number of members indicated, that the current and potential economic conditions accommodation well could justify additional policy," said the minutes.

A few others believed, however, further boost would be a bad idea.

These differences highlight tensions at the fed, uncovered in the course of last year, when officials contradicted political decisions both, because they were too aggressive in an effort to boost growth or as not assertive enough.

Economists on 11 of 17 of the financial companies, the deal directly with the fed that the Central Bank monetary policy further, either facilitated by buying mortgage-backed securities or Government bonds.

At its December meeting, warned the fed that turbulence by Europe's debt crisis will be a great risk for the US economy and it open the door, further steps to increase growth, mentioned registered itself as a slightly stronger labour market.

Recent data from employment to manufacturing so recommend that world's largest economy has gained momentum. Analysts believe strongly that growth is a annual rate of 3 per cent up years was the fastest pace in the fourth quarter, in 1-1/2.

The minutes showed many at the Fed who think recent economic acceleration is not preserved and that the United States a frustratingly slow slog back to economic health faces.

You also, that inflation expected most officials highlighted to settle or desired under layers.

Review publish forecasts is cool, that modest economic gains can mean that a move by the Fed could be drawing closer to tight financing conditions market expected to expectation.

"It does not mean that the Fed must be necessarily more leader," said the U.S. Eric green, head of research and strategy of TD Securities in New York prices.

He said "it just break is given in this way the composition the FOMC what 2012 will be a more challenging environment in the year and the expectation that inflation is, moving lower".

Two exhibited the proponents of stricter policy only in the voting ranks the FOMC shot.

Review to publish forecasts, the Fed is based on a number of other central banks, including those in Sweden and Norway, and a step towards transparency that Bernanke had promised when he took office in 2006.

Bernanke has an institution that once took pains to keep their decisions hidden from public view to one, which has offered a window in more and more of his work constantly.

But the path was not just one. The Fed reveals only the names of the institutions on its "discount window" on loan while the financial crisis after by a judge to do so.

Policy-makers last month as adoption of a Declaration on their long-term goals and strategy, a move that analysts said could a formal inflation target, long to take cherished political objective of Bernanke.

However, it took no action and officials agreed to debate the matter further at its meeting later in the month.

Copyright 2012 of the associated press. All rights reserved. This material cannot be published, sent, rewritten or redistributed.

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Europe cuts rates in surprise move

8:33 AM Europe, rates, surprise No Comments

The European Central Bank cut its main interest rate by 25 basis points to 1.25 percent on Thursday as the euro zone's worsening debt crisis outweighed the concern over persistently high inflation.

The ECB also reduced the interest rate on its deposit facility to 0.5 percent and the rate on the marginal lending facility to 2.0 percent.

The cut marked a change in policy course after the ECB increased its rates in July and April, when it became the first major central bank to hike after the intensification of the financial crisis. Markets are now looking for hints whether the ECB is preparing to cut rates again next month.

Attention will also focus on other changes in the central bank's policy after the change of guard, especially whether its government bond program will be boosted.

New European Central Bank head Mario Draghi is saying that Europe's debt crisis is slowing growth in the 17 countries that use the euro.

Draghi said that current market turbulence is "likely to dampen the pace of economic growth in the second half of the year and beyond."

He indicated a slowing economy reduced the threat of inflation.

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ECB raises interest rates, indications of further increases in

9:45 AM further, increases, indications, interest, raises, rates No Comments

LONDON - the European Central Bank has its key rate on Thursday and hinted more to come, the last character, that it will derail not by the debt crisis in its mission to fight inflation.

The Bank agreed however, liquidity to the Portuguese banks extend emergency, as it has done with Greece and Ireland, although one of the major rating agencies of the country's bonds to junk status downgraded.

Thursday's quarter point hike to 1.5 percent, was the second this year and, more generally expected markets despite a global slowdown and the debt crisis, which caused almost Greece this month to the default.

While these risks, Trichet control of inflation the ECB said the main task was. His comments that reinforced expectations that it will at least a further interest rate this year as the Bank increase inflation, get running again with 2.7 percent below the target of almost 2 percent trying.

Although higher prices for a potentially overheating economy as Germany may be necessary, they will ensure that growth more indebted countries of the euro area, add Greece and Portugal. Overall, Trichet said that euro-zone economy grew in the second quarter but saw at a slower pace than 0.8 per cent in the first quarter and the uncertainty about the Outlook remained elevated.

Trichet said in a press briefing the Bank would "price developments monitor very closely". Traditionally, he used that phrase to indicate that those who cycle will, continue the tightening angle but that prices would rise not next month.

"A further quarter point rate to hiking, probably in October or November is still the central scenario his", said Marc Ostwald, market strategist at monument securities.

The euro as investors in the likelihood of more rate cost about a penny to $1.4364 hikes at a time when the ECB collect colleagues, as the Fed is not the intention of repealing their double filter borrowing rates.

The question of the Greece was never far away in Trichet's remarks.

Trichet, the end of October will be replaced by Mario Draghi, said it was important that Greece continue with its cost-cutting measures, the control of public finances. Press at the expense of hard a damaging debt default the Greek economy with higher growth and lower unemployment would make more resistant while avoiding, he added.

Trichet was, once again, that should any participation of the private sector in a second bailout of Greece on a voluntary basis and that nothing should be done calls for rating agencies, to beat a "selective default" value to the country.

Euro-zone Governments are in talks with banks and other financial institutions to obtain, to share, which is expected to be completed by September as part of the load of a second Greek bailout.

Even if Greece is € 110 billion ($157 billion) a rescue package last year, it need more money as it is effectively locked out of international bond markets. Expectations are that the second bailout will more or less the same size as the first.

The ECB has criticized for its tough stance on a possible Greek debt restructuring, which would force creditors to their share of the pain.

"An unelected governing throws an increasing influence on burden-sharing between the private sector and the taxpayers," Sony Kapoor, Managing Director said an economic think tank the newly. "This is problematic."

Trichet said, however, that the Bank had suspended security rules for Portugal - as it has done already with Greece and Ireland, if its liquidity operations, d. h. of the country's banks still governing cash also tap when Portugal's credit rating is considered junk-e. The move comes just days after Moody's credit rating on Portugal, Europe's third bailout recipient after Greece and Ireland, slashed by four scores.

"That was to do the right thing - but also for the ECB, another sign of the withdrawal," said Gabriel Stein, an economist at Lombard Street research.

Stone said: this is the most recent example of this, such as the ECB which loses much-vaunted independence – previously it had stressed bonds under a minimum rating would not accept.

"Should probably think standard Greece or Portugal as we still remain in the euro area, it seems just as likely that the distressed bonds as collateral, accept the ECB", stone said.

Earlier in the day instead of the Bank of England continue to outweigh its base interest rate to an all-time low of 0.5%, such as the tepid economic recovery in the United Kingdom concerns about inflation.

Also in markets was expected to keep decision of the nine-strong Monetary Committee, the rate unchanged for the month of 28 straight on Thursday.

Even though inflation to more than double the Bank target of 2 percent to 4.5 percent is running, the majority of the rate-setters keep inflation will fall quickly next year, such as the impact of rising energy costs, annual comparisons drops out.

Copyright 2011 associated press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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