Investor Beware: Higher Interest Rates Looming

By George Leong

The rate on a 30-year fixed mortgage has been creeping up higher and just broke the four-percent threshold. This is a telltale sign that higher financing rates are on the horizon.

While there’s still hope that the Federal Reserve will hold off on reducing its bond buying at next week’s Federal Open Market Committee (FOMC) meeting, the reality is that the money party is coming to an end.

The failure of the Bank of Japan to deliver additional stimulus sent traders to the exits and resulted in the Nikkei 225 dropping down to below the key 13,000 level. What happened in Japan may be an ocean away, but the knee-jerk reaction was clearly indicative of nervousness among traders.

The reality is that interest rates are heading higher. It’s just a matter of time, so you better be prepared for the move, because it will affect investors’ portfolios, home sales, consumer spending, and the carrying cost of the massive debt levels consumers have accumulated during this period of cheap money.

Even worse, governments from municipal to state to federal will be facing a cash crunch when yields and interest rates ratchet higher. In many states, we are already seeing debt issues that are threatening to explode when interest rates rise.

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Case in point: California and its municipalities have amassed a debt load of about $848 billion, which could eventually be eclipsed by $1.1 trillion, according to The California Public Policy Center. (Source: “Report: California’s Actual Debt At Least $848B; Could Pass $1.1T,” CBS web site, May 1, 2013, accessed June 13, 2013.) This is scary news; furthermore, there are 1.64 million Californians unemployed and 4.2 million collecting food stamps. (Source: USDebtClock.org, accessed June 13, 2013.)

And then you still have the national debt, a situation in which the cost to carry the debt will only get worse as interest rates rise.

You need to understand that the threat of higher interest rates is real.

Income seekers who depend on bonds will be happy with the higher rates, but the many millions of Americans and other major debt holders will not like the higher rates.

To prepare for the eventual upward move of interest rates, you should make sure you begin to pay down debts and reduce your borrowing.

If you have made good money in the stock market, begin to examine which stocks are more vulnerable to higher rates and rotate away from those ones. The more vulnerable stocks may include those companies that offer financing to consumers such as automobile, real estate, and mortgage companies.

Companies that benefit from higher rates are the credit card providers, as the higher interest rates could mean less payments and higher balances.

This article Investor Beware: Higher Interest Rates Looming was originally published at Investment Contrarians