For the better part of 2015, economists and market participants have been speculating about when the Federal Reserve Bank will raise interest rates – specifically the Federal Fund rate. This is the rate at which banks borrow and lend to one another; and it essentially has been 0 percent for about seven years.
This prolonged period of low interest rates in the United States and abroad has punished savers and fixed-income retirees. Savers and retirees, who have not invested in stocks, but have only been CD buyers or have left large balances in the money market have been paid very little if anything on their savings and have lost ground trying to keep up with the cost of living. Therefore, higher interest rates would be a boon for these folks.
Bonds Continue to Defy Expectations
Another side effect of higher interest rates is lower bond prices. As interest rates rise, bond prices fall: that is the nature of how bonds behave and their relationship to interest rates. Yet, with all the talk and speculation of interest rates going higher before the end of the year, there has been little evidence in the bond market to suggest that bond prices will go down dramatically. In fact, we are currently at the same level of 10-year U.S. Treasury bond yield as the start of the year (roughly 2.1 percent) and quite a bit lower than the 3 percent level in January 2014.
At Perspective Financial Services, we do not attempt market-timing strategies or anticipate which way the stock or bond market will go in various economic environments. We focus on building a well-diversified investment portfolio to help reach our clients financial goals based on their tolerance for risk. Part of that investment mix usually includes an allocation to bonds.
Bonds have been a steady and stabilizing force in our clients’ portfolios during this most recent period of volatility and uncertainty. Despite the speculation and anticipation of higher interest rates and lower bond prices, we have seen bonds provide a good cushion of income, stability and risk management for our clients.