Reacting to Rising Interest Rates
By Bob Moeller
WEAC Member Benefits
June 2005
Financial
Planning Seminars
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As you have no doubt noticed, interest rates are rising.
Rising interest rates mean trouble for bond funds, whose value drops
with each rise in interest rates. The key factor is duration, which
indicates how far a bond fund is likely to fall if interest rates rise
1%. A bond fund with average duration of six years will tend to fall
6% if interest rates rise 1%. Any bond fund, including the bond funds
you might have in your tax-sheltered annuity, can quickly tell you what
its average duration is.
Because of rising rates, I suggest you be very careful
when investing in bond funds. The alternatives for many of you would
be CDs or fixed guaranteed interest arrangements.
I have been paying much more attention to CD rates lately,
particularly “specials” advertised by various banks. For
example, I recently saw a credit union newspaper ad promoting a 4% rate
on a 20-month CD. At the time this was way above the typical two-year
rate. Or, Madison’s Park Bank in April advertised 5.15% APR on
a 40-month CD. This rate was above most five-year (60-month) rates being
offered. Bear in mind that as this is written, 20-year government bonds
are paying only 4.6%.
How do you find these deals? You can just call around
and ask what the specials are. You should pay attention to your local
paper advertisements. Don’t hesitate to go national. If you look
in the latest copy of Money Magazine, or Kiplinger’s Personal
Finance, you will find a section showing the highest offered rates nationally.
If you go to the Google Web site, and type in “highest
CD rates,” you will find many offerings. As long as it is insured,
you don’t care what state it is in. Your money is safe and you
will have the opportunity to select the CD that pays the highest rate
for the time period you wish. The lists go from a few months to 10 years.
In terms of your TSA products, most offer a fixed guaranteed
rate which is reset periodically, perhaps once a year. The WEA Trust
rate is 4.5% and is reset once a year. The new rate is announced around
WEAC Convention time in late October. Check that against what your product
is paying.
Posted June 2, 2005