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Growth Investments
The market took a step back last week (a small one after Friday) amidst growing
concern that the Federal Reserve would not be making an interest rate cut anytime
soon. The domestic economy is looking strong enough to withstand a fed reserve
stance that does not include interest rate cuts and foreign governments are bumping
their interest rates against a strong worldwide economy. These stances have sent the
10 year treasury yield from 4.64% a month ago to 5.12% on Friday. Higher interest
rates hurt this bull market because the market expected lower rates before higher
ones. Some notes on the effects of higher interest rates to this market:
1. Higher rates reduce return numbers on leveraged buyouts which have buoyed
this market recently
2. Higher rates make bonds more attractive to large money players, such as
pension funds
3. Higher rates exert pressure on the consumer to purchase more goods,
therefore hurting corporate profits
4. Higher rates pressure corporate profits by increasing interest and borrowing
costs.
Income Investments
These higher interest rates affect the income portions of your portfolio more so than
the growth allocation. When interest rates go up, the value of the bonds in an
existing portfolio go down. This is because for the same amount of money, you
could purchase higher yielding investments in the current environment. This is a
short term concern, not long term. In the long term, bonds will still mature at full
value, and will continue to pay its interest until that time. With income investments,
the consistent INTEREST/DIVIDENDS/INCOME is more important to us than the
short term ups and downs. There is most definitely short-term volatility with the
income portion of the portfolio, but just remember, that as long as the investments are
paying consistent dividends, we are achieving our goal of INCOME.
We do believe that this is a short term downturn because of the quick jump in interest
rates. Remember that closed end funds do not have to sell their bonds in a market
downturn, this is one advantage of being “closed”. Therefore, the fund can hold the
bonds until they fully mature at full value. It is actually an advantage when rates go
up, as the fund can reinvest future dollars in the higher interest bearing investments.

Mitchell Reiner
Certified Financial Planner