Interest Rates are Still Going Up
Aug 1st, 2006 by Martin Lee
For once in a long time, we have interest rates going on an uptrend simultaneously in USA, Europe and Japan. Even in Singapore where I am, the inter-bank rates have gone up by a couple of percent in the past year.
Commodity prices are high, inflation is up and the central banks are trying to remove liquidity from the monetary system.
A high interest rate is bad for equities in two ways. One is the increased cost in borrowing for companies. The second is the lower valuation of equities (using a discounted cashflow model) due to the higher interest rate.
When interest rates are going up, it is also bad news for bonds.
For these reasons, I am very overweight in money market funds at the moment. I am looking to move some of it to bonds once there are signs of a stop in rate hikes.
For the Buffett-like investor, the movement of interest rates is another form of noise. There might be buying opportunities for stocks of companies with good fundamentals.
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