What's the best way to play the rising interest rates?
If you plonk your money into a savings account like Ubank, you get the benefit of just leaving it there and your monthly payment keeps going up as the interest rate goes up. But the downside is also true. As interest rates start to fall (2024 onwards?) then your return will snake back down just as fast.
If you put your money in a term deposit, you get to lock in the interest rate for x-months, which could be smart once the rate rise cycle has peaked. (2023-24?) Some of the term deposits let you lock in the rate for 5+ years. Which if you time it right, could be great.
https://www.canstar.com.au/compare/term-deposits/?amount=500…
If you buy Capital Notes then you get the benefit of a bonus margin, e.g. cash rate + 3-4%
(Capital Notes are issued by big companies like ANZ, IAG, etc, it's like lending money to the company and they pay you interest ABOVE the going rate. They are publically traded on the ASX.)
If you buy a Fixed-Income Managed Fund or ETF supposedly you get a smart person managing the fund and buying complicated fixed income products that normal person doesn't have access to, e.g. 2-year Govt bonds, Hybrid securities, Warrants etc etc, which might get you higher returns.
I was interested to see that MANAGED FUNDS that invest in fixed income securities e.g. govt bonds, have been performing exremely poorly, almost all returning deep negative 1-year numbers.
https://www.canstar.com.au/compare/managed-funds/?profile=Au…
Which is counter-intuitive but I read that it's because as the interest rate rises, the prices of the bond falls. So even if they buy a 2-year govt bond paying 4%, if the interest rate goes up, their bond goes down in price, which means the fund goes down.
Further explanation:
"As you can see in the above chart, global fixed income funds returned -6.78% over the past year. Aussie fixed income funds suffered significantly less, however, returning -3.66% over the past year. The reason for the poor performance is fairly straightforward. Bonds form the backbone of the overwhelming majority of these funds. Yields paid out for bonds traded on the secondary market broadly dovetail the cash rate (if they didn't, people would just move their money into the bank and collect income that way). But as yields rise, the value of the bonds falls. Hence the problem for fixed income investments already holding portfolios full of them. This is reflected in short term numbers, however, it is worth noting that holding a high-grade bond to maturity will see your principal returned."
Still seems kinda counter-intuitive that holding a fixed-income fund would perform increasingly poorly as interest rates and bond rates went UP ? You would think the distribution/yield would keep improving.
The other idea which seems popular is to put all the money into your mortgage offset account.
The advantage of that it's higher than the cash rate, so you're saving more interest than you'd be making in a savings account, AND you don't have to pay tax on any interest income. AND you get access to the money when you need it, which isn't the case with fixed term deposits.
Anyone have any other ideas of how to play rising interest rates?
The market consensus on current and future interest rates is already baked into the price of everything. If you think you can play the market, you are saying you can beat obscenely paid fund managers (that often fail to beat the market anyway).
If you have a mortgage, put it in the offset. If you don't, but want to keep access to it at all times, savings account. Only if you have money you don't need now (and you are willing to risk it), you can think about riskier stuff.