How can I take advantage of knowing the interest rate is going up?

Question

I'm in the process of buying a house and I see the interest rate going up daily. My Mortgage agent said the rate had gone up more in the past 3 weeks than it has in the past 3 years, and signals are showing it will only increase.

In what way can I take advantage of knowing the rate is increasing? This probably smells of an attempt at 'timing the market', but let's also assume I know for certain that it will go up.

Answer 1

If you're asking "What can I do to take advantage of becoming aware of generally held knowledge that interest rates are going up?", the answer is "not much"; that knowledge is already priced in. This would mean that fixed-rate mortgages are being priced at a premium compared to current interest rates (that is, the rate will reflect anticipated future rates in addition to current ones), so you will be paying higher than market interest rate in the immediate future in exchange for the right to continue paying that rate further down the road, when that rate becomes below market rate. So if you refinance before you get to that point, you will have paid for something you're not using. So that would be something to consider when deciding whether to get a fixed or variable rate mortgage.

If you think that you somehow have some special knowledge of interest rates going up that the market in general doesn't have, then the way to take advantage of that is to find derivatives that are anti-correlated with bond prices. If you have any bonds, you should sell them. As far as your house purchase is concerned, lock in a low interest rate with a fixed-rate mortgage. Or don't buy a house at all; higher interest rates will increase monthly payments, which will make people less able to afford mortgages, which will drive down house prices.

Just to emphasize, the preceding paragraph is an "if then statement"; it is what would be beneficial if you did have this knowledge. It's not a statement about what you actually should do.

Answer 2

In what way can I take advantage of knowing the rate is increasing?

In what way do you want to take advantage of this? For your own sake and home, buying now on a fixed rate if you absolutely know that the interest rate for homes will continue to rise will lock in your current rate. How you can absolutely know something is questionable, but you seem pretty certain that interest rates will rise.

If you mean other ways?

• Assuming that higher interest rates lead to a drop in mortgage demand, you could short mortgage companies, but understand this is risky.
• Also, a rise in interest rates means that bond prices will fall, so you could short the 10Y/30Y, but this is also risky.
• In theory, higher interest rates means savers might finally make some money in their savings, so you could stash extra cash away in a savings and possibly lock in a rate in a CD. You could also buy treasuries for the yield.
• At some point if rates continue to rise, the risk for holding stocks in an index may increase, so you could short a general index fund. Be careful, some companies make money when interest rates rise, so make sure it's an index of companies that need low interest rates to do well or survive.