Higher Interest Rates: What They Could Mean for Your Portfolio and Investment Goals

Higher Interest Rates: What They Could Mean for Your Portfolio and Investment Goals

Over the past few years, it seems that markets, investors, and even our own clients have been focused on interest rates and their effect on both stocks and bonds. After rates rose through 2022 and into 2023, markets were poised and expecting multiple rate cuts by the Federal Open Market Committee (FOMC or Fed), starting in March 2024. Now that we’re nearly halfway through the year without any reductions and the timing of any rate cut seems uncertain, the notion of “higher for longer” seems to be at the forefront of the financial news today.

I discussed the effect of interest rates on bonds in my December 2023 article. Now that rates are higher than before and there is uncertainty about when they may be lowered again, what does this mean for your portfolio and objectives, especially if you have a healthy allocation to bonds, particularly individual bonds?

The Tailwind Effect of Declining Interest Rates

While nothing is certain in the investment world, the direction of interest rate changes tends to have the opposite effect on both equities and bond values over time. As we saw in 2022, the rapid rise in interest rates had a gravitational effect on both stock and bond values throughout the year. Now that the Fed has indicated it may be finished raising rates and may look to lower them in the future, investors are eagerly anticipating the opposite result; an increase in the value of stocks and bonds that could drive markets higher.

This anticipation is due to many factors; lower rates may mean that higher-yield investments could be comparatively worth more, lower rates could help consumer and commercial borrowers (thus stimulating credit markets and economic activity), and lower borrowing costs for businesses could help earnings growth—all that could help inject a bit of financial steroids into market activity and economic growth, and perhaps stifle any recessionary seeds that may be germinating.

Higher Rates May Mean Opportunity

For conservative investors (or those with a more balanced approach to their portfolio allocations—having a mix of equity and bond (fixed income) investments), there may be some opportunities to take advantage of the current rate situation. Such investors may have been penalized over the past decade by the artificially low rates we’ve had. Now it could be their turn.

With rates at a seemingly high level for the moment, those who want fixed income in their portfolios might look at including higher-yielding bonds as part of their investment mix, perhaps with longer “duration” (a measure of sensitivity to changes in interest rates). Longer duration may cause a bond’s market price to fall when interest rates rise, but when rates fall, bonds with longer duration and higher yields may rise in value.

Many bond investors and portfolio managers are employing “capture yield” strategies where the uncertainty in the bond market over rates is creating special situations and pricing abnormalities. Such managers may find attractive-yield bonds at value prices during periods when the market has declined after disappointing news from the Fed or other events. The idea is that such investments may be rewarding later on if rates do go down.

Individual Bonds or Bond Funds? We Can Help

Whether to include individual bonds or bond funds (mutual funds or exchange-traded funds) in your portfolio depends upon many criteria. Bond funds offer diversification and a spreading of risk and may be most appropriate for smaller portfolios or for those investors who want a broad exposure to the fixed-income market to help lower volatility and provide income to an account.

Individual bonds may offer the ability to hold until maturity or special situations as mentioned above. Individual bond investing requires more effort and expertise but can be worthwhile if managed prudently. 

For our clients, Deerfield Financial Advisors employs individual bond strategies that could help realize investment objectives and financial independence. If you would like to learn more about how we manage bond sections of a portfolio, feel free to contact us.

About Marcus

Marcus Miller is Wealth Manager and Shareholder at Deerfield Financial Advisors, a fee-only financial services and wealth management firm with offices in Indianapolis and Chicago. His role includes strategic planning, income tax optimization, insurance and estate planning, and investment management for a diverse group of clients. Implementing Deerfield’s unique financial planning approach called WealthwhileSM, Marcus helps clients live their best lives and focus on their most worthwhile passions. He is passionate about helping them pursue, experience, and maintain true financial independence for their families, without the sales pitch. He truly enjoys helping people and developing deep, meaningful relationships with clients.

Prior to joining Deerfield in 2012, Marcus gained valuable experience at a Big Four accounting firm, a nationally recognized brokerage house, and a distinguished independent advisory firm. He holds a Bachelor of Science and Master of Science in Accounting from Ball State University, the Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™ designations and is a NAPFA Registered Financial Advisor. Marcus serves on the Board of Happy Hollow Children’s Camp and on the Planned Giving Committee at the Indianapolis Zoo. He is a member of the Professional Advisor Leadership Council at the Central Indiana Community Foundation (CICF) and is involved at his daughters’ school.
Marcus resides in Carmel, IN, with his wife, Andrea, and their two daughters. They love spending time outdoors hiking, bicycling, camping, and traveling to national parks. (They have a goal to visit all 63 national parks; Yosemite is the current favorite.) An avid reader, especially of non-fiction, history, and finance books, Marcus also trains in Brazilian Jiu-Jitsu, likening it to a physical chess match that involves problem-solving and mental strengthening with physical consequences. To learn more about Marcus, connect with him on LinkedIn.


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