As interest rates are expected to continue to rise, what will happen to your bonds?
The Federal Reserve recently raised interest rates by another half percent, and those rising rates are expected to keep climbing.
Financial expert Carl Carlson, CEO and founder of Carlson Financial, says if you have bonds in your portfolio right now, you need to be careful.
According to Carlson, if you owned an exchange-traded fund that held 10- to 20-year US Treasuries two years ago, today the value of your investment in that ETF is down about 25% or even a bit more.
Now US Treasuries haven’t gone bad, but the rate the Fed is charging is going up. So, every time interest rates rise, the value of bonds goes down.
Carlson said bonds and interest rates tend to have an inverse relationship.
Over the past 30 to 40 years, interest rates have come down. So when interest rates fall, bond values rise.
As interest rates have fallen, the value of everyone’s bonds has risen fairly steadily. This helps offset the stock market when the market is down.
When the opposite happens, when interest rates begin to rise, bond values begin to fall. So now we see portfolios and stock markets falling – and so are bonds.
Carlson said you really need to put yourself in a position where you don’t hold a lot of bonds, and especially long bonds, in your portfolios. Instead, consider a security that is not directly tied to your stock market investments, such as a fixed indexed annuity.
“People should probably start studying this product a bit in this one, you can’t lose money. If the market goes down, you don’t lose money. You just don’t get interest credit But if the market is going up, and it’s pegged to something in the stock market, like the S&P 500, then you get the upside,” Carlson said. “They usually limit it. Maybe you get half the upside of the S&P 500, but you have no downside. So that will give you security, good security, and then a nice potential upside below the rate of return.”