Consumer savings rate dips
Trading yield for riskBud Conrad, chief economist at Stowe, Vt.-based Casey Research, says it's quite possible that savers are fed up with low interest rates and are prepared to accept a certain amount of risk; but he urges caution.
"I think one of the biggest risks someone could take on is a long-term commitment, meaning a long-term bond. While they may be paying 4 percent, 5 percent, or a corporate bond may be paying 9 percent, they all fall risk to the problem of rising rates. In some sense 2009 was a precursor of that. The 10-year Treasury started at 2.4 percent and concluded at 3.8 percent. It was one of the worst years to hold a 10-year Treasury because the purchase price of the bond itself dropped."
If you were to hold the 10-year Treasury until maturity your principal investment would be intact but chances are the purchasing power of that sum would be severely eroded.
Even the most ardent savers aren't looking for a return to the early 1980s when the effective fed funds rate brushed up against 20 percent. But savers want better than to lend their money to banks for free.
Assuming you have at least three months' living expenses socked away in FDIC-insured deposits such as CDs or money market accounts, or even money market funds -- which are not FDIC-insured, Farr says he'd advise deploying additional savings into inflation-protected securities such as TIPS to hedge against the risk of inflation. Additionally, floating-rate mutual funds or exchange-traded funds are another way Farr recommends to shelter against interest rate risk and inflation risk.
If you buy CDs be sure to stick with short-term maturities so you can take advantage of higher rates as they become available and not get stuck with a low-yielding investment for a prolonged amount of time.
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