Portfolio Update: The Benefits of Rising Interest RatesSubmitted by Connecticut Wealth Management, LLC on September 10th, 2018
The buzz around rising interest rates continues to play out in markets and headlines this year. We have been discussing the notion that it will be difficult to make money in bonds amidst this environment for quite a while now. This is due to our central bank's (i.e. The Fed's) efforts to prevent the economy from overheating which can, in turn, lead to inflation. One way in which the Federal Reserve does this is by raising short-term interest rates. While the Fed’s management of interest rates remains one of the most widely debated subjects for investors, we do believe the current macroeconomic backdrop supports a gradual approach to raising rates.
So, what does all of this mean for the portfolio? We have discussed how rising rates negatively impact current bond prices. However, the bond portion of your portfolio generates the majority of its return through interest payments. As your bonds earn interest and your current bond holdings mature, they will be reinvested at these new higher rates. In other words, bondholders are taking a temporary step back in order to move two steps forward.
Cash is another area of your portfolio that will experience more immediate benefits from rising rates. On that point, we are pleased to share with you that you will be seeing a new default cash holding in your portfolio. Our Investment Committee worked with LPL to secure access to the “JP Morgan Money Market US Government Service Shares” money market fund. This vehicle is very similar to the previous cash holding used (i.e. no transaction fees or need to buy/sell the fund to facilitate distributions), but most importantly, this update means that the yield you earn on your cash will increase immediately by almost 1%. We are excited to bring this update to you given that this option is not available to all of LPL’s clients.
Utilizing a money market fund over an insured cash deposit as the “sweep” cash vehicle will forfeit FDIC coverage (i.e. government insurance) on that portion of the portfolio. Given the relatively low levels of cash in our clients’ portfolio, low risk of capital loss, and higher yields available, we are comfortable with this trade-off.
As always, feel free to reach out with any questions.