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What effect will rising interest rates have in 2010?

<p>Calendar year 2009 is quickly coming to a close, however, a new season is just around the corner -- the RRSP season.</p>

Calendar year 2009 is quickly coming to a close, however, a new season is just around the corner -- the RRSP season.

A key reason investors make RRSP contributions is to receive the tax deduction that so many use when filing their tax returns, and many leave their contributions to the last possible moment. Last year, investors were not happy with the market during RRSP season -- the country was in the midst of a recession and many did not want to invest in that type of environment. However looking back, that would have been the best time to put new money to work because the market rebounded significantly off the market lows in March and, with the exception of a few hiccups, have rallied ever since. What should investors think about this RRSP season? Is the market going to maintain its push higher in 2010?

In my opinion, 2010 will be kind to investors once again. Investor returns may not be as high as they were in 2009 but I believe that while interest rates and inflation remain low, the environment is still very good for people to make money. There will be issues that arise throughout the year that will have to be dealt with like any year, however I believe the central governments of the largest industrialized nations will continue to do whatever it takes to keep their economies moving forward through stimulus programs or accommodative monetary policy.

It has been mentioned by many economists that interest rates will rise in both Canada and in the U.S. in 2010. In Canada, the central bank has stated that the first time they will consider increasing interest rates would be after the second quarter. In the U.S., the time to raise interest rates is being debated daily. Many seem to think that interest rates will not rise until the end of the year, but I believe it may come a lot sooner than most would anticipate. When rates do rise in the U.S. and in Canada, I believe it will be a gradual increase. If the Bank of Canada and the Federal Reserve were to do something too quickly, it may provoke an investor panic that could lead to fallout on the major North American indices.

Thus, if these economists are correct (I believe that they are), and interest rates are poised to rise next year, what does that mean for average investors? First, anyone that has loans which are tied to the prime rate (variable loans) will experience higher interest rate charges. Investors need to prepare for this because more of an individual’s debt repayment will go towards interest costs. Regarding investments themselves, anyone that is in some sort of fixed rate security, such as a bond, could see the price of that security fall. Bond funds or other managed products that invest in fixed income securities could see prices fall. Please remember for those that own individual fixed income securities like individual government or corporate bonds, your pricing will be affected as well but if you own these products to maturity, you will get your original investment back (face value).

A slow interest rate increase should not influence fixed income products too much at first. The environment for this year will still be great for individual investors to grow their portfolios. Interest rates will not probably rise until mid year, which means investors should be able to enjoy a good investment environment for at least the next quarter or two. If you have money to be invested, I recommend it finds its way into a market I believe will produce good results once again in 2010.

If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!

Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.



 
 
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