Wednesday, June 28, 2017

Interest Rates Increases

The Wall Street Journal's article on June 28 by Min Zeng on A Bond-Investing Conundrum is interesting.  This article concentrates more on what the Federal Reserve will do with their balance sheet than on interest rates that affect the ordinary investor.  As an ordinary investor, I wondered are interest rates really going up or not?  

Take a look at the chart below that compares interest rates today with their 52 week low on 4 products:  U.S. Prime rate, Discount rate, 60 day 30 year Fannie Mae mortgage money and call money.   Each of these rates has significance for the ordinary investor. 






Call Money


Many investors borrow money from their broker using call money.  Call money must be paid on demand.  It can be be very useful to use leverage.  You can make bigger bets for bigger returns and yet, it can be risky as you better have the money to pay back the borrowed funds or the lender can liquidate anything in your account to be paid back.

Fannie Mae


Lenders use this rate to price their mortgages.  Most ordinary investors have a mortgage, not all but most and as this interest rate increases so do mortgage rates for you and me.

 

Discount Rate


Commercial banks and depository institutions borrow money from the Federal Reserve and this rate is what they pay.  It is the most volatile of the rates in this chart.   The discount rate affects ordinary investors less than perhaps Fannie Mae.  However, it will affect both the cost of you borrowing money as well as the amount you are paid on deposits by your local bank.

U.S. Prime rate


Providers of commercial and consumer loans use the U.S. prime rate as a basis and then add their profit.  When the U.S. prime rate goes up so does every debt product used by you and me.

Readers, interest rates are going up.  When we will be able to take advantage of that by moving income assets from stocks into bonds is still unknown but interest rates are going up.

M* MoneyMadam