Interest rates are climbing again, and that matters a great deal for anyone living on savings. The 10-year Treasury yield reached 5.10% on Thursday, its highest level since October, according to Yahoo Finance. TheTruthAboutMortgage.com reported the yield was up about 11 basis points during the session, driven by hot inflation data, higher oil prices and expectations for more Federal Reserve rate hikes.
The Fed’s benchmark rate currently sits in a range of 3.75% to 4.00%, and futures markets put the odds of a quarter-point hike at its December 9 decision at roughly 87% to 90%, according to CME FedWatch data cited by StockTitan and PrimeXBT. Here is how that backdrop can affect retirement savers.
The upside: better yields on safe money
Higher rates generally mean better returns on cash and new bond purchases. Savings accounts, certificates of deposit, money market funds and newly issued Treasuries tend to pay more when rates rise. For retirees who keep a cash cushion to cover a year or two of expenses, that can mean more income without taking on stock market risk.
Some retirees use a bond or CD ladder, buying securities that mature at staggered dates. As each rung matures, the money can be reinvested at current rates, which helps when yields are rising.
The downside: existing bonds lose value
When yields rise, prices of existing bonds fall. Bond funds that hold longer-term debt are especially sensitive. If you own a bond fund, check its duration, a measure of how much its price may move when rates change. A higher duration means bigger swings.
That does not mean bonds have stopped doing their job. Bonds held to maturity still repay their face value, and higher yields today can improve long-term income. But the short-term statements may look rough.
Borrowing gets pricier
Retirees who plan to buy a home, downsize or tap home equity should note that mortgage rates tend to follow the 10-year yield. TheTruthAboutMortgage.com estimated Thursday that 30-year mortgage rates were rising from around 7.375% to roughly 7.50%. Variable-rate debt, such as home equity lines of credit and credit cards, can also climb if the Fed raises rates.
Inflation is the bigger concern
Rates are rising because inflation is running hot. October consumer prices rose 0.4% from September, faster than expected, and wholesale prices are due Friday. For retirees, that means everyday costs may keep outpacing fixed income streams. Treasury Inflation-Protected Securities and Social Security’s annual cost-of-living adjustment offer some protection, but they may not fully cover rising expenses.
Steps to consider
- Review how much of your portfolio is in long-term bond funds versus short-term holdings.
- Compare the yield on your cash savings with current CD and Treasury rates.
- Pay down variable-rate debt where possible before further rate increases.
- Talk with a fee-only financial planner before making large changes.
This article is for educational purposes only and is not personalized financial advice.
