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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35397  
Subject: Implications of Fed pause Date: 8/9/2006 11:06 AM
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Yesterday, I bought 18-month CDs, 6.0% APY, from a local bank.

The Fed pause may or may not be temporary...rates may or may not rise, now or later.

The Wall St. Journal published an article, today, discussing many implications of the Fed's pause, on individual investors. I'll skip most of it, and focus on fixed income. Comments are invited.


What the Pause
In Rising Rates
Means for You

Fed's Inaction Could Be a Boon
For Homeowners, Borrowers;
Time to Consider Longer-Term CDs
By JEFF D. OPDYKE, JENNIFER SARANOW and RUTH SIMON
Wall Street Journal, August 9, 2006; Page D1

...
The Fed also noted that while some inflation risk remains, inflation pressure "seems likely to moderate over time."
...

For the past couple of years, bond investors -- as a way to keep their money relatively liquid in a rising-rate environment -- have been focused largely on short-term bonds that mature in two to three years. Now, however, as the Fed talks of a slowing economy, "you want to start thinking about extending the duration" of the bonds in your portfolio"...
That means locking in some longer-term bonds before interest rates start backsliding. Stick to high-grade corporate and municipal bonds that mature in seven to nine years -- so-called intermediate-term bonds.

...

Investors and economists generally foresee a weakening dollar. Though U.S. interest rates are still higher than those in Europe and Asia, that could be a temporary situation. While the Federal Reserve has declined, for now, to raise rates, central bankers elsewhere are expected to continue raising rates, which will pull investors out of the dollar and into foreign currencies.


end quote

1. What do you think, about lengthening duration? Is it time to begin the switch to bond mutual funds (as opposed to individual bonds and/or CDs)? What are your thoughts on duration of fund?

2. If the market believes the Fed, that inflation is due to moderate, then the inflation differential of TIPS will be relatively low, at the next auction. Despite the well-known drawbacks of government manipulation of the CPI-U, does it make sense to lock in, and buy TIPS later this year?

3. Foreign currency CDs are available, at www.everbank.com. What are your thoughts?

Wendy
(Cross-posted to Mishedlo Board)
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