Interest Rates: What We’re Watching Right Now

Hey everyone, Dave here. well, topic right now, as of the time I'm recording this video, interest rates have been moving higher and higher. And I think we're at like 5.15 or something on a 10-year treasury. And I've had a number of people ask me, Dave, are are you worried about this? What are we doing with bonds? And my answer is, heck yeah, I am paying attention to this. and I am looking at not so much as a bad thing, but actually as an opportunity. And here's why. When rates are moving higher and higher and higher, well, there's there's winners and there's losers. And if you're trying to buy a high s house right now or refinance your mortgage, I'm sorry. Higher rates aren't feeling very good right now. If you do already own longer-term bonds, rising rates absolutely can push the value of those bonds down. Again, note I said longer-term bonds. But if you're an investor like we have been, with money sitting in money markets, short-term bonds are cash. Well, heck yeah, shw long-term bonds are creating an potentially compelling opportunity. So I I want to explain a little bit about some of my thinking, what the game plan is with bonds in particular. if if you've been following me for a while, I've I've been talked about for a long time how we've intentionally kept a very, very large portion of the bond, the fixed income side of our portfolios. In shorter-term bonds and money markets and floating rate and things like that. Well, there was a reason. We were able to earn relatively attractive yields without taking a lot of interest rate risks. Basically, what that means is hey, we can earn a pretty good return staying short-term. I didn't like what intermediate long-term bonds were paying to take the additional risk of locking something into the long term. Imagine a CD where you have it locked in for five, six, seven, eight, nine, ten. All the way up to 30 years. At the rates of 3%, 2%, 4%, I was like, nah, no thanks. Well, my friends, that has started to change. The number I alluded to earlier that I'm keeping a very close eye on is the 10-year treasury bond. And I'm not watching it just because I have some crystal ball telling me exactly where they're going. I don't. Nobody does. But what I am looking at is the relationship between. This yield we can earn and the amount of interest rate risk we're taking. As that 10-year treasury is going higher and higher, well, guess what? Those longer bonds are looking more attractive to me. It's kind of like stocks that have been beaten up. You know, you're in more safer stocks, and it's like, hmm, those stocks don't look so bad now. And that's true here with bonds too. The higher rates are going, the more we're willing to move money out of the really safe stuff, and it is something taking a little bit more risk. but the key word here is gradually. I'm not gonna make one giant bet and say, hey, at 5%, this is amazing. This has to be the top. Move everything today out of short-term bonds into longer-term bonds. Well, what if rates go to five and a quarter, five and a half? I absolutely want to have some dry powder available. I want you to think about it kind of like walking down a staircase. At one level, we move a little bit, right? Yields become more attractive, we move another piece. If they become even more attractive, we move another piece. So essentially it's becoming more and more attractive. The higher yields get, the lower prices go. And I know I cannot pick the exact top and interest rates. It ain't gonna happen. But what I do wanna do is incrementally increasing attractive opportunities, take advantage of it as it as it hops around. you can imagine, let's say we have someone with a $200,000 portfolio. 100,000 is in stocks, 100,000 is in bonds. Remember out of this 200 total, we're just talking about the 100K here, right? Of that 100K, maybe 90 95,000 of it has been sitting in money markets, short-term bonds, floating rates, stuff like that. Well, imagine instead of waking up one morning and moving that entire hundred K into longer-term bonds, we pick 15,000 or 20,000, or less even. Rates go higher, we're gonna do that again with another five or ten or twenty thousand. Higher again, we'll do it again and again as as rates go up. Now, these aren't specific recommendations, these aren't magic numbers. The point here is process. We want to scale into opportunity instead of betting everything on one interest rate forecast. Just in the same way, hey, we've been a little more conservative on stocks, right? Stocks go down 10%. Hey, we'll get a little more aggressive. Stocks go down 20%, we'll get even more aggressive. Stocks go down 30%. Will get even more aggressive because it's becoming a better and better opportunity. And this is true of bonds. Same exact idea. Remember that bond prices and interest rates move at opposites. Rates are going up, that means bond prices are going down, particularly longer-term or intermediate bonds. I also want to say, too, that we're not focusing on long-term bonds. I'm focusing on moving out of short-term stuff into really what the benchmark is, the aggregate bond. index. So getting towards the index when we've been away from the index for so long. It's like not being invested in the S P. And now we're getting invested in the S P because it it's a lot more attractive. And certainly I totally recognize with the concern about governments and and servicing debt, rates could stay higher for longer. They absolutely could go higher. And that's why I'm not trying to predict the turning point. I think historically one of the mistakes investors make with bonds is is looking backwards. And this is true of stocks too, right? They look at bond prices being down. It's like, why would I want bonds now? When stocks are down, why would I want stocks? But the the better question is with a bond, what yield am I being offered right now today? I certainly think we could all agree four years ago, 2021 I think it was, tenure treasuries were at like one percent or less. 1%, that's the most you're gonna get paid for 10 years. Well now 5% sounds pretty good relative to that. so we'll see where this goes. I think it's kind of like shopping, right? Everyone says, hey, let's buy something when it goes on sale. Whether it's stocks or bonds, the sale happens, and now everyone's getting a little nervous. Bonds aren't the same thing as stocks, of course, but the psychology there is the same. Higher rates cause short-term pain. Which in then turns creates better opportunities for locking in your money for longer. I don't look at this and say, hey, this is terrible. I'm trying to say, hey, at what point are we being compensated enough to take more risk? And that, my friends, is the answer that we are prepared to act on. Whether stocks, bonds, I am ready. again, I don't pretend to know what's gonna happen, but we we are we have a plan. We are implementing the plan. We're gonna take advantage of these kind of opportunities as they come available. Not all at once. We're gonna we're not gonna try and call it top. because at some point it will be a point that happens, higher interest rates stop being a risk. And this is when it becomes amazing. So anyhow, have questions? Let's chat, set up a meeting or or give me a ring. Thanks so much. See ya.