“Even in a rising-rate environment, fixed income does give you diversification against risk-asset volatility,” she said, noting that a rate hike is a good time for investors to reexamine their asset allocation.
Savings Accounts
The Fed’s hike also means that the rates on so-called high-yield savings accounts will probably increase as well.
These online accounts — like the Marcus product from Goldman Sachs Inc. — became popular in the past decade as an easy way for everyday investors to keep their cash savings fairly liquid yet still earn higher returns than those offered by most regular retail banks.
When the Fed cut interest rates at the onset of the pandemic, the companies behind these accounts lowered their rates as well to maintain profits. In mid-2019, Marcus offered a 2% rate, but it’s now only 0.5%.
Although there will almost certainly be a lag, the rates on high-yield savings accounts will likely move higher as the Fed tightens policy.
“It’s this timing game that everybody is trying to play,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “Do you put something in now? Do you wait until it goes a bit higher?”
Still, it’s going to be a tough environment for savers, with inflation at almost 8%. That underscores the importance of having a balanced portfolio that includes both high-risk, high-return plays as well as safer bets like bonds, Miskin said.
Real Estate
Raging housing prices have everyone asking the same question — when will the market cool down?
The answer is impossible to predict, but some are hoping the Fed’s rate hikes will help temper demand and lower prices. That’s because mortgage rates will likely move higher as well, lessening the appeal of buying a home. Mortgages track the 10-year Treasury yield, which tends to move in the same direction as the Fed’s benchmark rate.
The mortgage market has already priced in some of the impact of higher rates, with the average for a 30-year loan hitting 3.85% last week, up from 3.05% at the same time last year.