It seems I receive another email almost daily with speculation about whether the Federal Reserve will raise the Federal Funds Rate. It has been going on so long, it's now appears to be a matter of when, rather than if. Why is this important for investors? There are 2 big reasons:
Businesses often need to borrow money for expansion, and presently their interest costs for doing so are the lowest they've been in nearly 50 years. When interest rates finally start heading up, it will be more expensive, and thus less attractive, for businesses to borrow for expansion. That has negative implications for shareholder profits.
The other reason is that bond holders are very much affected by the level of interest rates. If you currently own a 30 year bond from 2014 that is paying 3%, and the same company borrows more money this year, but has to pay 3.5% interest on the new borrowing, that means the bondholder with 29 years left on their purchase is earning 14% less interest per year than a buyer of the new 30 year bond. This results in the price at which the older bond can be sold going down.
Give me a call or send an email to schedule a time to talk about how these issues could affect you.