Interest Rates Are Rising. What Does That Mean For Investors?

Feb 5, 2018
Originally published on February 6, 2018 9:18 am
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RACHEL MARTIN, HOST:

Investors are nervously awaiting to see what happens in the stock market this week. On Friday, stocks plunged after the release of the January jobs report. The report indicated that wages are growing at a faster rate. While that's great for people's pocketbooks, it also raised fears about inflation and sent interest rates on bonds soaring. Interest rates are at their highest level in more than four years. To find out whether this means we should be buying bonds, we turn to NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: Hi.

MARTIN: All right. Walk me through this. Why do interest rates tend to go up whenever the economy is showing signs of strength?

ZARROLI: You know, you should just look at it as almost like a rule of nature. People, you know, spend more, employers start to hire, companies begin investing a little more. And, of course, that's great. This is what we want. But it also means people start to worry about where things are going. Are we going to see prices go up? And when prices go up, when you have inflation, what happens? The Federal Reserve comes in and tries to cool things down by raising interest rates. And then you see rates go up on all kinds of credit - on mortgages, auto loans. And this is starting to happen now. The interest rate on the 10-year Treasury bond, which is the benchmark that everybody uses, in July 2016, it was 1.36 percent. And then on Friday, it went above 2.8 percent, which is not really high, but it is rising.

MARTIN: So if interest rates are going up, what does that mean? I mean, does that mean I should be buying bonds?

ZARROLI: Well, actually, if rates are rising, it's usually a bad time to buy bonds. And the reason is this. Let's say you buy a bond with a rate of, say, 3 percent. You put it in your safe. You leave it there. And then rates go up to 4 percent, and then all of a sudden, that 3 percent bond that's sitting in your safe gathering dust is worth less.

MARTIN: Worth less. I mean, literally, those are two words. Worth less. You don't mean worthless.

ZARROLI: Right. And it works the other way around, too. If you buy that bond at 3 percent and rates fall to, say, you know, 2 percent then the bond that you're holding is worth more, which means you can sell it and you can make a profit.

MARTIN: All right. But most people own bonds through a retirement fund or a mutual fund, right? So what does that mean for them?

ZARROLI: Well, yeah. I mean, you're right. I mean, most people don't have bonds in their safe. If they own bonds, it's indirectly, through an investment fund. But the same basic rule applies. If that retirement fund owns a bunch of bonds and rates go up, the rates are going to be worth less. So if the people managing your retirement fund decide to sell off these bonds, which, you know, that's what they do all the time - they buy bonds, they sell them - they can lose money. And that means, you know, your retirement fund balance is going to go down.

MARTIN: All right. Bottom line, though. What does this mean about people's retirement funds? I mean, should I be changing how much of what I own in stocks and how much I own in bonds at this point?

ZARROLI: You know, that's a question that investment advisers get asked all the time, and they generally say you should always have a mix of assets, you know, stocks and bonds and other things. And what kind of mix you have depends on how much risk you like. If you're young and you can stomach it, you know, put your money more in stocks, like tech stocks. If you're close to retirement, you might not want to do that as much. The one thing you probably shouldn't ever try to do is time the market - stocks will go up next year so I'm going to shift into stocks. I mean, it's really hard to do that right. And people who know a lot more than you or I do lose money all the time that way. So pretty much decide what your, you know, asset mix you want is, and stick with it.

MARTIN: All right. NPR's Jim Zarroli with some good financial advice for us this morning. Thanks so much, Jim.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.