Will the tide soon turn for savers?
August 23, 2012
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.
- The drought. 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.
- Gasoline prices. 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.