We get a lot of questions about interest rates, the Fed, and how this will effect investment accounts. Rightfully so. In most conservative portfolios (or moderate, balanced, and even part of growth portfolios) bonds could help. Powell recently eluded to expecting rate hikes in March, which leads to the financial industry to continue guessing if there will be 3-4 rate hikes this yea.,
There are some characteristics of bonds that are in general investing rules:
- When bond yields go up, bond prices go down. This has been a time-tested principal, we just haven't had to experience it for some time now.
- Bonds already in circulation and invested in accounts could feel the effect of rising yields in a near-term drop in price.
- But it’s important to remember that rising yields can also create new opportunities. New bonds can be purchased with higher yields, and money that is scheduled to be reinvested can also take advantage of the higher yields. That could lead to more income being generated on a regular basis.
Until last night, I hadn't been waken up in the middle of the night by my kids in some time. The expended period of time could lead me to forgetting that sleeping habits, like bond markets, move in cycles.
Interest rates have been low for the past few years, so eventually the Fed would be expected to raise rates. We just don't' know how much and how fast. Based on recent announcements by Powell, the Fed has said it’s prepared to raise short-term rates in 2022 to help manage inflation.
Predicting what the Fed will do is extremely hard. So instead, building a portfolio to weather changes that could be expected is helpful.
Bonds can be confusing, but there's a reason why they continue to be held in accounts, even when interest rates are expected to go up.
If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity, an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk
Here is a great article from Forbes that points talks through what most expect from the Fed in 2022.