How will interest rates affect your bond portfolio? To answer this question, we focus on the long-term. Find out how in this week's Arista Advice.
Hello, welcome to Arista Advice! Question of the week is: "Paul, how will interest rates affect my bond portfolio?" It's an excellent question. The Federal Reserve has raised interest rates, and as they've raised interest rates bond prices have gone down, and yields have gone up, and this is affected investors and all of us.
Despite multiple rate hikes since 1980, bonds have had a positive performance 38 out of the 42 years. Although bond prices may fall in the short run, this may present an opportunity to increase future returns. Continuing to invest in bonds can generate more income by purchasing new bonds with higher yields.
As you'll see on this chart, here's our annualized bond returns compared to banks, short-term bonds, long-term bonds, high yield, and municipal bonds. Bank loans average yield is 5.5%. Short-term bonds are 2%. Long-term bonds are 4.1%. High yield is 7.9%, and municipal bonds, which are tax-free, are 3.8%. What's the conclusion? Interest rate increases can cause a lot of volatility in the short-term and in the bond market. But also, they present many opportunities that exist. Bonds continue to be a great part of our portfolios and for everybody's investment allocation because they provide the stability for future uncertainty because we don't know what lies out ahead in the future. Bonds are that stabilizing force, but you want to always have a mixture and be very well diversified. Hope this information is helpful!
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