Up Off the Canvas

Interest rates have been rising somewhat for the last 9 months. Picking themselves up off the canvas like a struggling prize fighter. For example, last summer you could get a 30-year fixed rate mortgage with a rate of 2.75%/year. Recently? 3.45%/year. Yes, a far cry from the 18%/year rates of the Jimmy Carter days. But still moving up lately. (source: Mortgage News Daily)

Why does this matter? Because rising interest rates make things temporarily more difficult for bond investments. As rates creep higher, the initial impact tends to be sluggish bond returns. Bonds suddenly feel like they are a well-conditioned athlete who is running a race with a 50 pound pack strapped to their back.

For many investors, bonds are an essential part of a portfolio. Yes, they can be stodgy and boring……..but they are often dependable. Most pay interest over and over into a portfolio, and frequently bonds can act as partial stabilizers when stocks go through a rough patch.

Bonds do move a little bit in price, but nowhere near the way stocks can move. 

Over the last 90 years:

• Stocks were down about 1 out of every 4 years. And when they were down, some of the declines were as deep 20% or more.
• Bonds were down about 1 out of every 10 years. And when they were down, most declines were small declines of 5% or less.

(source: Bespoke, Inc.)

And historically, rising interest rates have actually been good for bond investors who plan on continuing to invest in bonds. Why? Because long-term returns in bonds tend to be enhanced by rising rates. Simply stated, you get to start collecting more interest on the new bonds you buy when your old bonds mature or get called.

If you own a bond-heavy portfolio, short-term stagnant periods created by rising interest rates are a normal part of the wealth creation & preservation process.

The views expressed herein are those of the author and do not necessarily reflect the views of Raymond James & Associates or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.

The investments listed may not be suitable for all investors. Raymond James & Associates recommends that investors independently evaluate particular investments, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment will depend upon an investor's individual circumstances and objectives.