Interest Rates Soar
It was just a few weeks ago that I discussed how rates are rising, but I have been talking about this for quite some time. Now, the media is really picking up on it. My first article on interest rates was an explanation of the inverted yield curve in April. The 2-year Treasury yielded 4.90% then, the 5-year was 4.56%, the 10-year yielded 4.52%, and the 30-year was 4.63%. All rates have risen since then despite the Federal Reserve cutting Fed Funds by 1% over three straight meetings in September, November and December. Fed Funds is now set to be in a range of 4.25-4.50%. Here is the current set of rates for the Treasury Yield Curve:
So, despite the aggressive (and expected) action of the Federal Reserve Board to cut short-term rates, rates have increased for longer-term securities. The 5-year is about unchanged, and the 2-year has declined, but the 10-year is up and the 30-year is up more.
Just since 12/24, rates are higher across the entire curve. The 2-year is now 3 basis points higher, the 5-year has gained 11 bps, the 10-year has increased 14 bps, and the 30-year is up 15 bps. It's a steepening, rising yield curve.
The 30-year Treasury is pushing a multi-year high. Currently at 4.95%, it has more than doubled from the lows during the pandemic. Here is the 5-year perspective:
It is not just U.S. Treasuries, as mortgage rates are rising as well. Freddie Mac posts weekly updates, and Thursday the 30-year fixed-rate mortgage rose a lot to 6.93% after testing 6.00% in September. Mortgage rates have more than doubled since the pandemic low:

So, despite the actions of the Federal Reserve Board to cut rates, interest rates are rising. This is what I saw ahead when I recommended fighting the Fed right after the first cut in Fed Funds.
Why Are Rates Rising?
There is no survey of buyers and sellers of interest-rate securities or futures, so I (we) have to guess. I think that there is concern that the Federal Reserve Board may have moved too much or may be done. Previously, the markets were pricing in substantial rate cuts beyond what has happened already.
People used to consider inflation dead, but the pandemic has proved that it certainly did not die. Still, inflation, which was a big menace in the early 80s, has become much less of a challenge. Fed Funds hit a high of 19% in the early 80s. Here is a chart of the level since the 50s from Statista:
I started on Wall Street trading mortgages in 1986, and Fed Funds were a lot higher then as were other rates of interest. Here is a chart from Macrotends of the 10-year Treasury, currently at 4.76%, over the past 63 years, a little longer than my lifetime so far:
While rates are much higher than they were in early 2000 (below 1%!), they are clearly a lot lower than they used to be. One's perspective on whether rates are "high" or "low" now depend upon one's age or sense of history. Many younger people are seeing rates near the highest in their lives, while middle-aged and older folks remember how much higher they were in the 80s.
Incoming President Trump advocates tariffs, and this could be inflationary. It remains to be seen if these tariffs will be put in place. When he was President from 2017 into 2021, the U.S. federal debt grew due to tax cuts, and during Biden's presidency it expanded even further due to spending. Of course, a lot of that spending followed the pandemic. Trump has set up DOGE, headed by Elon Musk and Vivek Ramaswamy, to help reduce the size of the government. It is still too early to tell if the Department of Government Efficiency will help improve the federal balance sheet. DOGE is set to expire by July 4, 2026, so we should learn soon!
The national debt is currently over $35 trillion, which is a huge amount relative to our GDP. In 2023, it was at $31.5 trillion. Here is a chart of it over time, presented by Statista:

In 2020, after the pandemic hit, it was $21 trillion, up from $14.2 trillion in 2016. Higher rates of interest harm the U.S. federal government, which has to pay more to service this debt. Perhaps this is why rates are rising.
What Do Higher Rates Mean?
If rates are higher, stock valuations could get pressured. The PE ratio inverted can be thought of as directly comparable to yields. This earnings yield isn't set in stone, nor is its relation to Treasury yields. The key questions are earnings for what period (trailing or future), and which maturity for Treasury yields.
Let me give an example. A stock that has a 20 PE has an earnings yield of 5%. If the PE is historical rather than prospective matters. If a stock has the 20PE based on 2024 earnings and is expected to grow earnings substantially in 2025, the PE will be lower for 2025. Assuming 20% earnings per share growth, the PE looking at 2025 will be 16.7X, which gives an earnings yield of 6%. The yield curve is very flat now, so the issue of what Treasury to use for the yields is not especially relevant. I have typically used the 5-year, which is currently 4.57%. So, the earnings yield for this stock is higher right now and in the future. I think that a better perspective is to compare it to corporate bonds, which have higher yields.
So, rising rates may can make stocks look less attractive. They may also cause the economy to slow. Think about mortgages. At a higher cost to buy houses, demand usually is lower, and the rate of mortgages contributes to the overall cost. Similarly, for companies to borrow, the higher rates can impact their costs. The cost of borrowing is tax deductible for corporations, but company earnings could come under pressure or they could curtail borrowing for things that could expand growth. For the federal government, higher Treasury rates will compound the cost of servicing debt.
What Can Investors Do?
For those who think that inflation will continue to come down, bonds are probably a buy. This is not my view. I don't have a strong feel for what inflation will do going forward, but I am fearful of potentially higher inflation if the tariffs go through. At the same time, the global economies could suffer slowing or negative growth in the years ahead, and this should be good for bonds.
If inflation comes down, bond investors might be better off buying mortgages or corporate securities, as the spreads to them should boost the total returns. I am not an expert at this time about whether the spreads are appropriate, so anyone going this route should make that determination. For those that think a recession is ahead, I suggest that buying long Treasuries will probably work out better.
One idea on bonds that I have shared is TIPS, which are Treasury Inflation-Protected Securities. I first wrote about this way to beat inflation in early October, and I have invested substantially in a fund, the Pimco 15+ Year US TIPS Index Exchange-Traded Fund (LTPZ), though there are other ways to invest in TIPS. I discussed some of these ETFs in early December. The idea is that these are very large and liquid but not highly understood. Despite all of the concerns regarding inflation, as indicated by the sharp rise in gold, there hasn't been much attention by the media on this inflation protection part of the market.
TIPS currently yield less than Treasuries, but not by enough. The current yields range from 2.04% for 5 -years to 2.58% for 30-years. The spread between TIPS ranges from 2.53% for 5 years to 2.37% for 30 years, both of which are less than the 3% current rate of inflation but above the 2% target of the Federal Reserve. The rates have increased over the past five weeks:

Here is the largest TIPS ETF, the iShares TIPS Bond ETF (TIP) and gold as represented by a large ETF, SPDR Gold Shares (GLD) over the past 10 years (on a total return basis, which includes dividends):

Gold has shot up recently, while TIPS have been flat-lining. Again, the way TIPS works is that the the maturity value is adjusted for changes in inflation.
It seems to me that the longer TIPS offer a lot of upside if the world figures this out. As I said, the ETF that I own, LTPZ, stands out from my perspective. There is a large ETF that holds only longer-dated Treasuries, iShares 20+ Year Treasury Bond ETF (TLT) that helps me to explain why the price has been under pressure for LTPZ:

This is an extremely close pair, which makes no sense to me at all if people are worried about inflation. The above picture is the past three years, but immediately before, which include the pandemic, shows that these don't always track so closely. Look at how much LTPZ outpaced it when investors were concerned about inflation in the nine months ending 6/30/22:

These funds have the same credit risk of the U.S. Government, which could be the problem as we struggle with the debt limit, but they have very different exposure to inflationary risk. Here is a look at the two since September 2009 (when LTPZ launched), which shows that they generally do track each other:

So, for those who want to take advantage of higher rates but fear inflation, I think TIPS make sense.
I reviewed a book on REITs recently,but I didn't say in that review that I was inspired to take action. I have covered one REIT on my watchlist for a long time, Alexandria Real Estate Equities (ARE), and it is very cheap. After reading the book, I did a screen of the REIT sector and ended up adding three other REITs to my watchlist. I currently own two of them.
What is so great about REITs now? Well, they are sensitive to interest rates for many reasons and have generally sold off, perhaps too much. I have found several that trade near tangible book value, seem to offer good dividend yields and valuations and don't appear to be struggling with too much debt. I want to caution that I don't feel that all REITs are buys, but I do think that some make sense as part of an investment portfolio right now.
With the caveat that I have been bearish on stocks for a long time and been very wrong, I continue to view stocks as very dangerous right now. I have written about this a lot, but the valuations are very high, especially for the Magnificent 7. I last wrote about them near Labor Day as stocks looked stocks were beginning to melt down, but they have rallied a lot since then despite the rise in rates. Here is the perspective since Labor Day:

The S&P 500 has returned about 4% since then, while the NASDAQ 100 has returned almost 7%. I also watch the Russell 2000 (Small-Caps), which has declined slightly. Only two of the Magnificent 7 are up less than the S&P 500.
Since the end of 2021, the Magnificent 7 have all soared more than the S&P 500:

My basic idea now is that high rates provide an alternative investment that can and often does get investors to move from stocks to bonds. For those who think that bonds are going up because the economy is about to boom, please disregard what I am expressing, as I will continue to be wrong about the direction of stocks.
So, I am betting against stocks right now, though I am not a permabear. There are a lot of permabulls out there! Like always, they are saying never sell, but anyone investing today can remember or is aware of 2008 and 2009. That was pretty bad! Of course, there have been other tough times. I was working on Wall Street in 1987 when the market crashed. This proved to be a great buy opportunity. The Great Depression was a very tough time for stocks that took a long time to change.
I understand that people are different, and I understand that there are tax implications and perhaps costs to reducing exposure to equities. For those who don't want to sell, I get it. If you are feeling bearish and don't want to sell, there are alternatives. I don't trade futures or options, and these can be tough, but they are a way for people to hedge their portfolios. I understand the risks of leveraged inverse ETFs, but I use them in my IRA.
Last week, I bought a lot of stocks in my IRA and even one in my trading account, though I remain net short. For those looking to reconstruct their portfolios, I suggest reducing large company stocks and perhaps choosing some smaller ones. While we are in a bull market overall, it is very narrow, and there are a lot of seemingly good investments among smaller companies. The Russell 2000 is down more than the S&P 500 in 2025 so far by more than the S&P 500, but not by much.
Within the large caps, I suggest cutting exposure to technology stocks. I am also concerned about the large financials, like the big banks and the credit card stocks. I am also negative regarding a few large specialty retailers.
The REITs that I like are not the very largest ones, though one that I own. NNN Reit (NNN) is down 7% in 2025 so far and is reasonably big at $7 billion. A riskier one that I own, VICI Properties (VICI), is down a bit less, and it has a market cap of $30 billion. ARE, which I have been following for a long time, has a market cap of $17 billion. These three REITs have all had negative total returns since the end of 2022:

So, 2025 is off to not a great start for investors, with stocks down just a bit after two very strong years. Higher rates seem to be one of the drivers. I have shared my perspective on what I am doing and why. I wish you the best ahead.
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