Careful debt-management strategies that avoid short-term borrowing or the bunching of maturities and hedge against interest-rate or exchange-rate swings should come high on the agenda.
Following two days of sell-offs in stock markets across the globe--and a week ahead of its Federal Open Market Committee meeting (when the rate cut was expected)-- the Fed slashed short-term interest rates by three-quarters of a percentage point, its single most dramatic rate reduction since 1984.
To influence demand, the central banks move a short-term interest rate up or down by adjusting the supply of bank reserves.
The Federal Reserve's decision on September 29th to lower its main short-term interest rate by a quarter point is simply an injection of Vitamin B-12, meant to give a healthy economy a bit more vigour.
Until the Great Recession, the Fed limited its purchases of Treasury paper to short-term bills that carry no interest rate risk.
The first half of the interest rate forecast is very simple: short-term interest rates will remain in microscopic territory through 2013.
In December, it exhausted its supply of conventional monetary ammunition when it lowered its short term-interest rate to between zero and 0.25%.
That is, the interest rate on Argentinean short-term paper, or the price of the peso on the forward market, reflects the risk of a surprise devaluation that will cost you a chunk of your capital.
Unrealized gains are not taxed, long term realized gains and qualified dividends are taxed at the federal rate of 15%, short term realized gains, non-qualified dividends and interest income are taxed at ordinary income rates, which today can be as high as 35% at the federal level and higher still adding in state taxes.
Finally, realize that even in the current low interest rate environment, short-term, low-yield bonds offer the advantage of liquidity and little downside risk, allowing them to potentially play an important role in your portfolio.
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For example, the Goldman Sachs monetary-conditions index (based on a weighted average of short-and long-term interest rates and the trade-weighted exchange rate) suggests that America's monetary policy is currently at its tightest since 1989, largely reflecting the strong dollar.
More than ten years on, the wisdom of the fund's strategy is still in dispute. (If an economy carries a lot of short-term debt, high interest rates may wreak such havoc that the exchange rate collapses anyway.) But whatever its merits during the Asian financial crisis, the high-rate defence has little appeal today.
If short-term interest rates (primarily the target Fed-Funds rate) are close to zero the impact of more bank credit and more money creation through open market purchases remains.
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Still, floating-rate bond funds may be the best fixed-income deal available in an environment of rising short-term interest rates.
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