2 Investing Implications of Higher US Rates

Real U.S. rates have been climbing, while rates are falling in much of the rest of the world. As Russ explains, this divergence has a number of implications for investors.

While U.S. economic data continue to come in mixed, the numbers still point to decent U.S. economic growth. That, along with some evidence of stabilization in international markets, has pushed the odds of a December interest rate hike by the Federal Reserve (Fed) higher. As a result, real U.S. rates have been climbing.

As I write in my latest weekly commentary, Digesting the Implications of Higher Rates,” I expect the rise in long-term rates in the U.S. will be contained, given several factors, including demographic trends and institutional demand for long-term, high-quality bonds. But the fact that U.S. rates, both long- and short-term, are rising while rates are falling in much of the rest of the world has a number of implications for investors.

How Higher Rates Impact Investors

1. The dollar will continue to strengthen, keeping pressure on precious metals. Over the past six weeks, while U.S. rates have risen, rates have declined in Germany, Italy and Japan, according to data accessible via Bloomberg. Looking forward, we will likely continue to see a divergence between U.S. and international short-term rates as central banks in these regions maintain easy money while the Fed tightens. This rate divergence helps explain the renewed strength in the U.S. dollar, which last week reached its highest level since the spring, as Bloomberg data show.

The combination of a strong dollar and rising real rates is having a predictable effect on precious metals prices. The simultaneous rise in real and nominal rates reflects the fact that inflation is contained and that puts downward pressure on the price of precious metals (since they are viewed as an inflation hedge, but provide no income, they consequently become less attractive). This time is no different, with gold and silver trading back down toward their summer lows, below $1,100 per ounce for gold, according to Bloomberg data.

Given this environment, I remain cautious on precious metals. Still, having a hedge against inflation in a portfolio is a sound strategy, and I prefer Treasury Inflation Protected Securities in that role.

2. A stronger dollar supports the case for hedged currency exposure in international stocks. I continue to like international developed markets, such as Europe and Japan. However, a strong dollar can erode the local gains made in international stocks. As such, given my expectation for further dollar appreciation, I believe investors should use vehicles that hedge most or all of their international currency exposure.

 

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2015 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

 

iS-17098