What the Pending Rise in Interest Rates Could Mean for the Bond Market

During the most recent Federal Reserve meeting, Fed Chairwoman Janet Yellen indicated that interest rates will likely rise in the future. Kyle Jones, Financial Planner at Wamhoff Financial Planning and Accounting Services, outlines what this could mean for you.

  1. Federal Reserve and Interest Rates
    • The Federal Reserve has kept the key Fed Funds rate at or near 0% since late in 2008.
    • The last time the Federal Reserve raised interest rates was in 2006.
    • During the Federal Reserve press conference, Yellen indicated that the first rate hike will likely occur later this year and possibly as soon as the June Federal Open Market Committee Meeting, depending on economic data at that time.
  2. How Interest Rates Affect the Bond Market
    • The bond market, in general, has been in a 30 year bull market where interest rates have consistently moved lower. Investors who have been purchasing government-backed bonds have seen strong overall returns for many years.
    • Generally speaking, bond prices move the opposite direction of interest rates. When interest rates decline, bond prices rise. When interest rates increase, bond values decline.
    • For investors who own individual bonds or bond-based mutual funds, rate hikes could cause some bond-based investments to decline in value.
    • Not all types of bonds will react the same way to rising interest rates. For example, bonds that have maturities that are more than ten years will see prices negatively impacted the most, whereas bonds with variable or floating rates will not react as negatively.
  3. What Investors Should Know about Bonds Before Considering Any Changes
    • If individual bonds are held to maturity, there is a reduced risk of losing investment.
    • Asset allocation and a well-diversified portfolio will remain a strong driver of investment returns. Combining a mixture of stocks and bonds can help to improve a portfolio’s balance of volatility, enhance portfolio returns and income potential.
    • Investment grade bonds have historically moved in the opposite direction of stocks.
    • As always, it is best to consult with a financial professional prior to making any major investment or portfolio decisions.

    Sources:
    http://www.theguardian.com/business/2015/jun/04/federal-reserve-interest-rate-hike-markets-investments

    http://www.latimes.com/business/la-fi-janet-yellen-federal-reserve-interest-rate-20150522-story.html

    http://www.latimes.com/business/la-fi-janet-yellen-federal-reserve-interest-rate-20150522-story.html

    http://www.investinginbonds.com/learnmore.asp?catid=3&id=57

    https://www.jpmorganfunds.com