What goes down might come up

By September 17, 2019 No Comments

Interest rates, depending on what maturity you are looking at, are at the lowest levels they’ve been in decades. If you have borrowed money, you may want to look at refinancing that debt. Likewise, if you own income-producing bonds, you may be hard-pressed to know what to do with the bond proceeds when bonds or CDs come due. This month, we take a look at both.

Refinancing may make sense

When interest rates fall, mortgage refinancing goes up. In the old days, it was a laborious and expensive process to refinance. People were often told that they needed at least a 1% drop in refinance rates to make refinancing worthwhile. Well, technology and market efficiency have changed all that. 

Nowadays, one can refinance and have it “make sense” sometimes with as little as a 0.5% change in interest rates. Many of our clients have used Danny Delgado at Guaranteed Rate to handle their mortgage refinancing. Danny and his group are licensed in all 50 states and the process can be done exclusively online. Refinancing is an easy way to increase cash flow in a household and add to savings. You can also consider refinancing student loans and auto loans. 

Be mindful of your risk/reward

On the other end of the spectrum are those that depend upon bond income – usually retirees – and who are presently disappointed in how low interest rates have gotten. Five-year Treasury rates are around 1.70%. 30 year Treasury rates are around 2.30%. Treasuries are safe, so many people are inclined to go to longer maturities to capture that higher yield.

As we state in the title of this piece, “what goes down, might go up”, interest rates, at some point in the next 2 years, may start to rise. If rates rise one percent, those five-year Treasuries might fall 4% in value…about two and half times the yield one expected on the bonds. The 30 year Treasuries could fall a whopping 19% in value, over eight times the yield that one expected on the bonds.

Because of this outweighted high risk/low reward situation, we are focusing on an average maturity in the 5-7 year part of the curve for our bond portfolios. The risk/reward seems appropriate, and it helps capture more yield than would be had if we stayed in cash.

Curious about bond portfolios? We’d welcome your questions or comments!

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