Read on for more insights into bonds and fixed income investments.
After nearly two decades in the background, bonds are back in the media spotlight. Some national commentators have declared the current bond market to be the most attractive one in years. In fact, on July 7, the two-year Treasury rate passed 5% for the first time since 2007.1
Despite this, some investors remain confused about the current state of their fixed income investments, because while interest rates have gone up, prices on bonds have gone down. Less experienced investors may not have expected bonds to have negative returns and don’t fully understand that there is an inverse relationship between interest rates and bond prices.
That said, this is where quality matters. If you have high-quality bonds in your portfolio and you hold those bonds until maturity (what’s known as the “duration” in bond investing parlance), then you should not only make all of your principal back, but you should also end up in positive territory with the interest gain.
The “inverted yield curve” means you can earn more on short-term bonds or “paper” vs. long term bonds, but that is tempered with the knowledge that it also a potential indicator of a coming recession, so uncertainty remains part of the outlook.
Still, there are some opportunities available now that haven’t been there in many years, such as the ability to earn 4-5% on short term government bonds. This can be an appealing option as a place for an investor to put cash to work and earn interest on a short-term investment that’s safe and stable. This can help deliver some of the income that investors will need in retirement.
Now that the Fed is signaling a slowdown of their increase of interest rates, there’s also the opportunity to lock in better yields on longer-term bonds and decrease the risk level of your overall portfolio, particularly if you are approaching retirement or are already retired.
Got questions about your fixed income portfolio? Please consult with your advisor before making any investment decisions. For additional information from RMB about the bond markets and interest rates, you can also read our June Market Commentary.
