As the economy recovers, interest rates will start to increase. To many, rising interest rates are a bad thing because they lead to higher rates on mortgages, auto loans, and credit cards. Although it’s true that higher rates can hurt, rising interest rates can also be a good thing because you can earn a greater return on your investment dollars. Here are a few investments that will make you extra cash when interest rates start to rise.
Increase the amount in your checking, savings, and money market accounts.
Rising interest rates are good news for your bank account. The average financial institution has been paying a paltry 0.26% interest on a savings account. That barely beats storing money under your mattress! A rise in interest rates means a rise on all of your banking products. High yield savings accounts, interest bearing checking accounts, and money market accounts will all get a boost from rising rates.
Change the interest rate on your CD.
Bank certificate of deposit (CD) rates are directly tied to interest rates. Rising interest rates are sure to put a smile on the faces of step up CD owners. A “step up” CD gives the owner the right to opt out of their old interest rate and opt in to a higher interest rate. For example, say you invested in a three year CD paying 2% interest and a year later the CD rate increased to 3%. Just notify your bank that you want to “step up” to the new rate and you will start earning 3%. It’s as simple as that! Here are a few companies offering “step up” CD’s. First Midwest Bank has a Rising Rate CD that automatically increases your interest rate every eight months. Bank of America offers an Opt-Up CD that lets your increase your interest rate during the term of the CD. Ally Bank offers a two Year Raise Your Rate CD which allows you the flexibility of changing your rate one time over the two-year term.
Buy an inverse bond fund.
Long term bonds perform the worst during times of rising interest rates. The longer the bond maturity, the steeper the decline. Be sure to avoid treasury bonds and treasury notes. They are longer term securities that pay interest for 2,3,5,7,10 or 30 years. So, how can you make money off of the decline in long term bond prices? Buy an inverse bond fund. The Profunds Rising Rate Opportunity Fund and the Rydex Inverse Government Long Fund are two of the more popular funds. It may not seem patriotic but inverse bond funds will allow you to profit when government bond prices are dropping.
Go with a short term bond or bond fund.
If you want to benefit from rising interest rates, take a look at short term bonds. Treasury bills are great short term maturities that mature in one year or less. They are auctioned off below face value and are redeemed at face value. You can also create a bond ladder that will allow you to reinvest the proceeds from lower yielding securities into higher yielding bonds as they mature. You can buy any type of short term government bond that you want using the Treasury Direct website. Another way to buy short term bonds is through a short term bond fund. Short term bond funds hold up much better than intermediate and long term bonds during periods of rate hikes. PIMCO, Vanguard, and T Rowe Price are just a few of the companies that offer popular short term bond funds.
Invest in consumer staple stocks.
Rising interest rates increase the cost of borrowing which slows down economic growth. One category that does not suffer from rising rates is the consumer staple sector. Consumer staple companies thrive because their target market does not rely on financing to make purchases. Consumers are always going to buy food, beverages, soap, toothpaste, toilet paper, deodorant, detergent, etc. Companies like Proctor & Gamble (PG), Johnson & Johnson (JNJ), Kimberly-Clark (CMB), Pepsi (PEP), and Coca-Cola (KO) will serve investors well in any economic situation. These companies also reward shareholders with a healthy dividend yield.
What do you think? Are there any other investments that you think will do well when interest rates rise? Share your thoughts in a comment.