Interest Rates: A Rising Opportunity

In the financial pages of your selected periodical there has no doubt been much talk of late about interest rates: Do they need to rise? When will they rise, how much should they rise?

Though the Governor of the Bank of England Mark Carney has equivocated on the issue, the signs are that such a rise cannot be delayed for much longer. The Monetary Policy Committee (MPC), the panel that sets the Bank of England interest rate, met this week; although they voted to keep rates at the current level, economists are expecting at least some members to vote for a rise in the near future. Such a rebellion has already happened in the United States Federal Reserve.

A similar outcome at the Bank of England may provide momentum for a more imminent rise. After all, the current low interest rate of 0.5% was originally intended to be only a temporary measure when it was first implemented more than 5 years ago in March 2009. This situation means it is time to look again at your investment portfolio. A rise in interest rates is likely to affect what many have previously considered to be among the safest options: bonds. It is one of the golden rules of the market that as interest rates go up, down prices go down. As bonds are issued with a fixed interest rate at which the holder will be paid (a coupon); if interest rates rise then this bond will fall in value as it will pay at a lower rate than newly-issued bonds.  In economic terms the “opportunity cost” of holding bonds will rise. John Stepek, Editor of MoneyWeek, was quoted this week as saying that it will ‘prove toxic for bonds’ if both inflation and interest rates rise.

In an article entitled ‘Bonds are a lot riskier than many investors think’, MoneyWeek pointed out that the bond market may now be at a long-term peak; as economies begin to recover, bonds are set to fall. This may provide another compelling reason to rebalance your investments.

There is no denying that the fine wine market has gone through a tough few years, but with the market at a low point and set to rise within the next year there is certainly a case for reallocating assets: exiting one market at a high and entering another at a low. July 2014 saw the Liv-ex 100 index experience the smallest decline since December 2013; Justin Gibbs at Liv-ex has reported that the same index actually outperformed global equities in July.

This could be the perfect time to enter the market.