How the Fed’s Rate Hikes Will Affect Your Finances – AARP

December 22, 2021 by No Comments

How to capture rising yields in CDs

If you’re a fan of CDs, the best way to play these fixed-income investments now is to only lock your money up in short-term CDs, such as those that mature in three, six or 12 months. When the Fed periodically hikes rates, you can roll over your short-term CDs at maturity into new higher-yielding CDs, says Schlossberg. “You are riding the rate increases higher,” he says. “If you take the view that over the next two or three years you expect rates to move up steadily, over time those yields will look more attractive.” It also makes no sense to lock in a three-year CD that the FDIC says now yields an average 0.81 percent if the Fed’s key rate is on track to yield more than that by year-end 2022.

One strategy to consider if you want to take advantage of a series of rate hikes is to ladder your CDs. Buy a three-month, six-month and 12-month CD, and when the first CD matures after three months, you can reinvest the money into a one-year CD, which will earn more than the three-month CD. The other two CDs will be three and six months closer to maturity. And when they mature, you can roll them over into one-year CDs, too.

Bond holders: short-term pain for long-term gain

Since there is an inverse relationship between a bond’s price and its yield, the bad news is the value of your bonds will fall when interest rates rise, resulting in some short-term losses. “When rates go up, your bonds go down in value,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management.

But that doesn’t mean you should give up on bonds, which provide income and diversification for your overall portfolio. The good news is that in the long run your principal loss will be made up by the higher income payments. And, just as with CDs, that means if you own individual bonds, you’ll be able to buy new bonds that offer higher yields or roll over the money you receive from maturing bonds into bonds with plumper yields. “You have to be able to take short-term pain for long-term gain,” says Bill Schwartz, managing …….



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