57. If interest rates starts rising? should we switch to bonds?

 

The Philippine central bank held its benchmark interest rate at a record low of 2 percent during its December meeting, saying the current monetary policy stance is appropriate to support the economy amid uncertainty over the fallout of the new Omicron coronavirus variant and as inflation expectations continue to be anchored to the target level. The interest rates on the overnight deposit and lending facilities were also kept at 1.5 percent and 2.5 percent, respectively. Policymakers noted that the projected inflation path remains within the inflation target band of 2-4 percent over the policy horizon, despite the higher-than-anticipated inflation outturn in November, while downside risks to the economic recovery emanate from the emergence of new COVID-19 variants as well as the potential tightening of global financial conditions. 

source: Bangko Sentral ng Pilipinas

The world's central banks manages interest rates levels as a lever to influence the direction of the economy, it's also their primary tool in combating inflation - the financial scourge of modern times

at the onset of the pandemic when most businesses slowed down due to social restrictions, major central banks starts cutting interest rates as a way to spur economic activities, the idea here is to make borrowing expenses more affordable to provide companies with a cheaper source of funding to maintain their operations.

but there is only so much that interest rates can be lowered, nearing zero with no more room for further cuts, central banks resorted to infusing liquidity into the system through the purchase of bonds and other fixed income securities

These massive amount of liquidity may push prices higher causing inflation

The common reaction of central bankers to counter inflation is to raise interest rates, higher rates could reduced liquidity by attracting idle funds to resulting higher paying fixed income instruments

The stock market usually reacts negatively to rising inflation and interest rates, should we switched to bonds?

If your investment objective is current income from the regular coupon payments, then bonds can be a good option, as rising interest rates may cause bond prices to fall, be on a lookout for good bargains once it starts going down

how about bond funds? it follows the same principle, it may "drop first" to adjust to higher interest rates, the best entry would be when interest rates starts tapping out

for now, idle funds are best placed in short term placements that reprice higher every time you renew

all the best my friends!

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