Has the day of reckoning for bonds arrived?
The good news is that the economy has continued to show signs of improvement. The bad news is that, as a result, interest rates may finally be on the rise.Why are rising interest rates bad for investors? After all, doesn’t that mean that we can finally earn higher interest on conservative investments?It is true that new bonds, CDs and other fixed income investments will be issued with higher interest rates. However, those investors who currently own bonds (or bond funds) in their portfolios could see their existing positions decline in value.Over the last three months, interest rates on 10 year treasury bonds have increased by 0.6%. During this period of time, diversified bond indexes of various maturities have had the following performance:
Long Term Bond Index: -6.3%
Intermediate Term Bond Index: -4.0%
Short Term Bond Index: -0.8%
For some, this type of short term performance can be a bit shocking. Especially, since bonds are widely considered a “safe” investment . After all, over the last 30 years, there have only been a few periods in which bonds have experienced negative returns. While we do expect rates to trend upward over time, we do not expect a dramatic increase to higher levels.So how should you approach bonds going forward? Here are some suggestions:
Temper your return expectations for the bond segment of your portfolio. While most bond mutual funds have generated returns of 5% or more over the last 10 years, we would not expect this to continue going forward.
Diligently plan for anticipated portfolio disbursements. For those taking systematic portfolio withdrawals, it may be prudent to earmark those disbursements into cash or the most conservative (short term) types of bonds.
Recognize the important role that bonds play in your portfolio. The purpose of bonds is to generate portfolio income and serve as a ballast against the volatility of stocks.
Please feel free to call our office if you would like to discuss your portfolio in more detail. Have a great summer!