Are Bonds Still a Good Investment? (Great Read) Investors are concerned about how the prospect of a continued rise in interest rates could impact portfolio valuations. For bond investors, rising rates— which move opposite to prices—can take a pretty good bite out of monthly statements. Over the last year, we’ve watched rates on the 10-year U.S. Treasury increase by over 1% (100 basis points), which equates to a decline in price of approximately 4% on a bond or portfolio of bonds with an intermediate duration in the four-year range (a range often included in leading indexes). Unfortunately, there is no escaping that reality or relationship; as interest rates rise/fall, bond prices fall/rise. The recent spike in rates has not been the result of Federal Reserve action. Rather, the rise has been the result of market reaction: that is, investors selling bonds (presumably at lower prices) out of fear that the Fed may taper or suspend bond purchases in the future as economic conditions continue to improve. In the meantime, the economic picture, albeit a bit rosier than in previous months, remains muted. The Fed has said they’ll maintain bond buying, or quantitative easing (QE), until annual inflation rises or the unemployment rate drops (the Fed has targeted a 6.5% rate, give or take; unemployment stood at 6.7% in December). We are not there yet, and it remains uncertain what the Fed will do in the near term. Although increasing rates have hurt bond prices in the short run, some experts on Wall Street suggest that the market has already priced in the possibility that the Fed will reduce or discontinue the QE program that has helped to keep interest rates at historically low levels. Read More... tickertapemonthly/2014/january/are-bonds-still-a-good-investment/?accept
Posted on: Fri, 24 Jan 2014 17:48:48 +0000