What the rapid rise in rates could mean for investors
Higher short-term interest rates are the centerpiece of the Federal Reserve’s effort to quash persistently high inflation—which appears to be working, said Gregory Davis, Vanguard’s chief investment officer, in a guest column for Barron’s. But many investors today have little experience navigating this type of interest rate environment.
What should investors be thinking about?
- Bonds finally offer income again. Many broadly diversified bond mutual funds and ETFs currently have yields exceeding 4%, at long last delivering meaningful current income to investors.
- There’s also cause for celebration at the shortest end of the yield curve. While many bank savings accounts are still offering less than 1%, some money market fund yields are now at 5% or more, the highest they’ve been since the early part of the 21st century.
- The rapid increase in rates has led to a significant repricing in equities. Such repricings are invariably painful for investors, but the upside is that they set the stage for stronger expected equity returns going forward.
- Expect a bumpy ride. The markets likely will remain volatile even after interest rates plateau, as rate changes take a year or more to fully work their way through the economy. But investors can position themselves for investment success over the long term by building a strategic portfolio that capitalizes on the improved outlook for stocks and bonds, and then staying the course.
Read Davis’s guest column in its entirety at Barron’s.
(Note that Barron’s content is available by subscription only.)
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Access more insights from Vanguard through the links below:
Why the Fed will not cut rates this year (web article, issued June 2023)
A look back and forward at active bonds (web article, issued in May 2023)
Bloomberg Intelligence podcast: Investing over speculating (podcast, issued in April 2023)
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