Bond prices fall as interest rates rise, but things aren't that simple. Bonds can cut risk as the central bank increases interest rates.
When interest rates rise, as is happening now at an accelerated pace, bond prices fall. But that doesn’t mean you should avoid bonds.
Holding a portion of your portfolio in bonds is actually a way to cut risk. That may sound counterintuitive but read on. Explained below are strategies that can help you mitigate the risk of bond investments, even though the current interest-rate cycle will likely push prices down. With inflation running at a 40-year high, it may take a long time before the upward direction of interest rates reverses. Can you wait? How long might you have to wait?
Central banks’ stimulus, low interest rates and very low yields for long-term bonds have pushed money into U.S. equities. The S&P 500 Index’s SPX average annual return for the past five years is 15.8%. That compares to an average of only 7.3% for the previous 10-year period, according to FactSet.High inflation and rising costs, especially for labor, and an eventual resistance to price increases, may push the the above chart in the other direction.
You can beat your fear of losing money with bonds as interest rates rise — if you understand this one thing. The case for owning bonds until maturity If you buy your own bonds and hold them until maturity, you know how much you will be paid back when the bonds mature. You might have an easier time navigating a period of declining bond prices than you would if you were watching your bond-fund share price decline.
The Treasury table provides a good indication of the overall bond-market rate curve, and you can see that three-year and five-year notes have higher yields than 10-year notes. This has been an indicator of previous recessions, however, it might have a very long lead time.These strategies may seem complicated, but they are typical ones that you can follow with the assistance of a broker of investment advisor.
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