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  • Writer's pictureJames McGlynn CFA, RICP

Silver Linings from Higher Interest Rates

Updated: Mar 26, 2023

Jan 27, 2023

THE FEDERAL RESERVE raised the federal funds rate in 2022 from zero to more than 4% to combat high inflation. While those rate increases severely damaged the stock and bond markets, they made some financial products more attractive. In particular, there are three products that are more appealing now than they were a year ago: income annuities, long-term-care insurance and various interest-paying investments.

Like many people, to take advantage of low loan rates, I refinanced my home mortgage before 2022’s rising interest rates. By contrast, owning bonds in recent years didn’t seem compelling because bond yields were below the inflation rate. But as the Fed rapidly raised rates over the past year, bonds and cash investments have become much more attractive. Money market accounts, which had yielded 0%, are now paying more than 4%. Ten-year Treasury notes have seen their yields increase from below 2% to well over 3%. Other fixed-income instruments, such as Treasury Inflation-Protected Securities and Series I savings bonds, have also become more attractive.

Similarly, income-annuity pricing has become increasingly compelling as rates have risen. Insurance companies that sell annuities can pay handsome income thanks to three factors: gradually returning annuitant’s initial investment, earning interest on the money that annuity buyers invest, and “mortality credits,” where annuity owners who die young effectively subsidize those who live to a ripe old age. As bond yields have increased, insurers can earn more interest, which means the annuities they manage can pay more income. Both single premium immediate annuities and deferred income annuities now offer bigger payouts than they did a year ago.

Meanwhile, long-term-care (LTC) insurance premiums have decreased as interest rates have climbed. Insurance companies had earlier underpriced LTC policies, in part because they’d assumed interest rates would be higher than they were. But rising rates have eased some of the pressure that insurers were under. Result: Purchasing LTC insurance—both standalone and hybrid policies—is now less costly.

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