How High Will It Go?
 

The Fed rate, that is. Many of us remember the 1970s and 1980s and what happened back then, high inflation, very high interest rates.

How can a portfolio be positioned in preparation?

Any ideas or suggestions?

While interest rates are rising, buy only short term bonds and CDs, 2 year duration or less.

Makes sense to me as long as you want to stay out of the market.

Yep. Had a bond mature today. Immediately rolled into a 1-year Treasury at 5.04%

We're not collecting retirement yet so I have bonds that mature every month. If we need money fast it's always less than a month away.

Our actual retirement funds are still predominantly in the market.

Watched ABC (Australia) this morning they are also expecting more rate hikes for Central Bank unemployment rising from 3.5% to 3.7%.

This was definitely the right approach for the last 12 months. The question is will it continue. If you look out on the yield curve, it doesn't seem like it will last. I think we have another 3-4 months of higher highs on yields and then I'm locking in the rates for 5-7 years.

My approach has to build a bond ladder by purchasing Treasury bonds that mature in 12 months or more and have a 0 to 1% coupon interest rate. That way my interest income is very low and the rest of the bond income is taxed as capital gains. (this minimizes my federal income taxes) I have been buying bonds for more than 1 year now and have some maturing every 2 or 3 months.

Not sure I understand your post. Typically, if you buy a new Treasury bond and hold it until maturity, you will pay income tax on the interest earned annually, regardless of the term of the bond. There are no capital gains. The only way to earn capital gains on a Treasury bond is to buy it at a discount and sell it for a higher price than you paid for it. Are you buying over-the-counter bonds at a discount?

I remember the fed rate got up to about 19% in the early 1980s. Those were crazy unstable times IMHO. These are crazy unstable times, too, but for different reasons and in different ways. I have no idea where it will go so remain defensive, in short term T-bills except for good solid stocks I have held a long time such as BRK.

I remember in the 80's when interest rates were high.
I also remember leaving work one day when interest was 19%
Went to the bank and borrowed $5,000 at 12% and invested it at 19%.

Ay.... to be young again.

Borrow at 1% and invest at 2,3,4%. This is the main reason why we are in an inflation crisis. The fed kept rates too low for WAY too long. Do you remember when rates were actually negative in certain countries? Why wouldn't you borrow free money? We are the land of consumerism. Of course we are going to borrow and spend. Household debt just reached a record 16 TRILLION. Household debt surpasses $16.5T in Q3 amid inflation, rising demand: NY Fed report | Fox Business. Of course companies are going to borrow to grow their business. Heck, even Apple is borrowing money with a staggering 51 BILLION dollars in cash. Something is rotten in the state of Denmark and it's not my $1 eggs.

buying an interest bearing bond at a discount means that, there is a taxable gain on the basis and an interest income on the interest. they are taxed at different rates. generally you don't recognize the gain until maturity. A zero coupon bond by definition the discount is the the interest, which may get taxed annually as interest. . i am fuzzy on that while drinking my coffee prior to going to home office to work.

However, that is considered efficient investing whereby you are always maximizing wealth and minimizing future taxes. . . this is not a tax avoidance scheme as in not accepting high income/selling for capital gain as one has to pay more taxes, which is regressive thinking.

As far as inflation goes right now, goods inflation is declining, energy and food is declining, but home owner equivalent rent, ie rent increases is the bulk of the increase, along with services labor. So, how does this impact the economy?

First, rising service incomes and falling goods prices is a tailwind for the working consumer, which is why Jan retail sales post christmas was so strong. Good for the economy in general. . . Now, the gov't brain trust changed the inflation comparative basis for CY23 and so the increases might not last as long and then inflation falls like a rock. that is the best news for buying low coupon rate high discounted basis bonds for huge relative capital gains. . .

As far as stawks go, consumer goods sector will go well, industrial/mfg will recover, etc. and large financed purchases will not, such as cars, homes, banks for loan income, and slowing discretionary sector. So the market is in a large sideways range, where there will be more chop and derivatives influences between like 3600 and 4200, not exactly but conceptually, depending upon the earnings and the near term economic signals.

So for many, and same for me, its best to just sit and wait and collect 5% interest and dividend income, until the market presents an undervalued dismal outlook p/e ratio. . . if the market long term return is 8%, maybe 10%, then 5% when there is slow/no growth in the market really good. . prior to putting more money into the market. Those in the market, just stay put, as a crash is highly unlikely unless there is a nuclear accident in asia / taiwan . .

future former finance manager with more to say about overhead transmission lines

on a tech note: Microsoft's corporate Office 365 annual renewal increase starts at 15%, and their whole goal is to sell storage space with all the f* backup copies every time you open and change one item. . .

5% interest risk free is too good to pass up. I just locked in a MYGA @ 5.4% for 5 years in a retirement account. It's my first foray into annuities, so I didn't commit much.