Buckling Up For A Bond Rate Bump

Individual investors tend to think of bonds as the conservative part of their portfolio, but now we're in an environment where bonds may present increased risks. The Federal Reserve began tapering its economic stimulus program in January, with market strategists widely predicting that rock-bottom interest rates, which have fueled a 30-year bond market rally, will likely trend slowly higher. The central bank's decision to take the training wheels off the U.S. economy is a positive sign overall, indicating the markets are now sturdy enough to stand on their own.

But a healthier economy also presents a challenge for fixed-income investors, who want/need to rely on conventional Treasuries and long-term bonds as a stable income source.

Many bond investors don't realize the risks they may be facing in a rising interest-rate environment… Interest rates and bond prices move in opposite directions—when interest rates rise, bond prices fall, and vice versa. Some fixed-income securities are more sensitive to interest-rate changes than others; generally, the longer the maturity, the greater the sensitivity to a move in interest rates.

Many industry experts insist that interest rates will remain at historical lows despite the government's gradual reduction of quantitative easing—and that may be true for a while. But the federal funds target rate, which is artificially low due to the Fed’s intervention, currently hovers near 0 percent. Ultimately, it likely has nowhere to go but up.

To read the entire CNBC article: http://www.cnbc.com/id/101326909. And if you would like for us to review your bond portfolio, please give us a call on 804.625.3290.

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