Bond Investors be Patient
In the Bond Market, Good Things Come to Those Who Wait
Last week the Federal Reserve met and decided to raise short-term interest rates by 25 basis points. This move was expected. We now know that rates will continue to rise incrementally at a higher rate than was initially expected. While this may have a negative impact on bonds in the short-term, higher rates over time allows for reinvestment at those higher rates and better returns.
If interest rates remained where they are now the value of the bond would remain the same but investors would be reinvesting at the lower rates of today, affecting a lower yield. It is important to always remember that markets move both ways, and it’s possible that the recent upward trends in yields may reverse, which could push bond prices back up.
The reason to have bonds, or fixed income, in a portfolio is because of the low volatility and having a secure, known cash flow. While the value of existing bonds may decrease in an environment where interest rates are on the rise, the benefits lies in how interest payments can be invested once those bonds mature.
Why does this matter?
In the Dimensional Fund Advisors article attached, via link, to the end of this post, the takeaway is that we, as participants in the market, truly set the rates and trigger the changes as our expectations shift over time.
Making decisions (buying and selling) based on what is happening to your investments on a day-to-day basis is not a long-term strategy. Patience, when it comes to the bond market, is a virtue. While there may be losses in the short term, our strategy will facilitate growth over time. Reinvesting those bonds that mature into new bonds at the higher rate will make up for losses and have the potential to increase gains to more than they would be had the rates stayed put.
Our advice is to be patient, good things come to those who wait. And, in the meantime, should you have questions or are seeking investment advice, feel free to contact us.
Sources:
1. The Fed, Yields and Expected Returns, Dimensional Fund Advisors, Dec. 2016