Category: Interest Rates
Don't Let Your Bonds Suffer as Interest Rates Rise
After the most recent interest rate increase in mid-Mach, The Federal Reserve has signaled that it is likely to continue raising interest rates both this year and next. Bond investors have been concerned about this for years, but this time it looks like its going to happen. That may have you wondering how do I manage my bond portfolio in the face of rising interest rates? Generally speaking, bond yields go down as interest rates increase. But remember, while bonds may decline in value, their moves tend to be smaller compared to other securities. Many investors are flooding into U.S. Treasury bonds, making the so-called flight to quality, because right now, the U.S. looks better than other economies worldwide. This means that medium and longer-term bonds whose rates are often more influenced by investor expectations than anything else are likely to be most affected. But, there are many strategies you can use to manage your bond portfolio in a rising interest rate environment. 1.
What the Fed rate increase may mean to you
Unless youve been sound asleep, you are aware that this past week the Fed increased the federal funds rate for the first time since 2006 to a range of .25% to .50%, and most major domestic banks raised their prime lending rate from 3.25% to 3.50%. While this increase may seem tiny, and may not affect you at the moment, the real question is what does this rate height mean to you over the longer term? First of all, you need to understand higher interest rates are actually good news. The Federal Government believes the worst financial crisis in America since the Great Depression is over. Secondly, we can expect that interest rates will continue to rise over the next several years. How much, and how often is anybodys guess. Third, rate rises will be a two-edged sword. Interest on saving should grow, but so will debt like credit cards and mortgage rates. Fourth, everybodys situation is different, so the rate increase is like an early warning to review your financial situation with a qualified
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