November 3, 2004

3:30 PM

Investment Question: Broadly speaking, if somebody believes that interest rates are likely to substantially increase in the near to mid-term, what would be the best investment strategy?
posted by willnot to (5 comments total)

i'm no expert, but doesn't that mean that putting money in a bank and earning interest makes more sense? you don't want to be borrowing money, so don't buy a house on a mortgage. or, at least, you only want to borrow in the short term. try to pay off your loans. more generally, it might mean slower growth, a weaker economy, fewer jobs, but lower inflation.
posted by andrew cooke at 3:47 PM on November 3, 2004

Find variable-rate paper (good luck!) or keep your duration short. Avoid negatively convex bonds like mortgage pools (wherein you are the lender). As I suggested in another thread, if you think that rising rates will be accompanied by inflation (the two rarely decouple for long), look at TIPS or I-Bonds.

Also, many banks will let you "break" a CD after 6 months, penalty-free. Most people don't (even as rates rise), out of some foolish loyalty to the bank. So, read the fine print but buy the best-paying CD you can find, and then screw the bank.

If you've got brass balls, take out a second (fixed) mortgage, plop the loan amount into a money market, wait for rates to go up, buy a long treasury bond, and set up automatic payments from the bond's coupons to the mortgage company. Autopilot.
posted by trharlan at 6:13 PM on November 3, 2004

When interest rates go up, stocks usually go down. When people can make good money via a savings account, why take the gamble on the maket. Knowing this. You could short stocks hoping they'd go down and make some money. I've never shorted a stock. Maybe someone here could tell us more about that, but if everything worked out you'd make some dough.

pwb.
posted by pwb503 at 7:08 PM on November 3, 2004

A bit of an overstatement over longer timeframes, pwb. As a rule, rising rates are not good for stocks, but they are hell on bonds.

I can't get these two charts to play together without doing more work than I care to do, but see here and here.
posted by trharlan at 7:44 PM on November 3, 2004

You could invest in blue-chip Euro stock. Some industries are simply going to be around in the next few decades while the shit hits the fan over here. If you want to stay local, I'm sure the booze and entertainment industry will see some jumps. People gotta have their bread and circuses.

Don't buy any real estate. Especially don't buy any real estate in Florida.
posted by Civil_Disobedient at 7:56 PM on November 3, 2004