Last Wednesday, the Federal Reserve made a landmark decision to raise benchmark interest rates for the first time since 2006. The announcement included an initial rate hike of 25 basis points (0.25%-0.50% from 0.00%-0.25%), and projected a one percentage increase in rates each year for the next three years.
At this point, the outcome was widely expected by (and priced into) the market, and the Fed did not reveal any big surprises. That being said, opinions vary on what the impact of this will be on a range of asset classes going forward and investors are evaluating options for their portfolios.
Fed Chair Janet Yellen emphasized that the the moves will be slow and gradual. The statement from the Federal Open Market Committee (FOMC) revealed the same sentiment:
“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
How Can Investors Capitalize?
Mortgage rates should go up gradually but as the markets enter new and unchartered territory, we will have to wait and see how borrowing costs are affected over time. With this increase, and the ones to come, we think there are ways investors can capitalize on a higher rate environment by putting money to work in short-duration assets like PeerStreet’s real estate backed loan investments.
We previously discussed these advantages when capital markets were choppy coming off the summer into September. Our Liquidity and Yield in a Highly Volatile Market post details how some investors create short-term bond ladders to manage reinvestment and smooth out interest rate risk. Diversifying portfolios in this way allows investors to redeploy capital in new, higher interest rate loans that become available (due to higher prevailing market rates) as their prior investments pay off.
The following ladder, which is also detailed in our prior post, represents a hypothetical $300,000 in capital that is reinvested across several PeerStreet loan portfolios over a 2-year period.
So, while we do not expect a dramatic market change in the immediate-to-near term, investors can visualize the benefits of building investment portfolios with shorter-term assets in a rising interest rate environment.
P.S. – PeerStreet’s Automated Investing feature allows you to set investment term parameters so you can easily manage maturity buckets and construct short-term ladders for your portfolio.
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