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Rising Interest Rates? Falling Bond Prices!

Monday, June 8, 2015

by Sheila Jamison & Rich Jamison

June 5, 2015

We added a surprisingly strong 280,000 non-farm jobs in May. What’s more, the March and April numbers were revised higher. Despite the weak Q1 GDP and a number of other shaky economic reports that came from the winter, the employment numbers suggest we’re doing a lot better than those other ones suggested.

What this means bottom line is that a Fed rate hike is very much back on the table for 2015. And we’ve seen interest rates climbing recently ... perhaps in anticipation of what’s to come from the Fed.

What does this mean?

A Fed rate increase as several market ramifications. The most obvious is what happens to bonds and bond fund prices. We’ll deal with that today.

No Lack of Attention

The concern for bonds when the Fed finally acts is not new. It’s been on the table for the last 2-3 years. It was a front-and-center topic when Bernanke only mentioned that the Fed would eventually have to raise rates. We saw the 10-year Treasury spike from 1.66% to 3.03% between April and December of 2013. And though economists felt rates would continue to rise from there, they pulled back, falling to 1.67% at the low point in February this year. Still we all know that they will go up sometime.

FINRA on Interest and Bonds

FINRA has posted warning information on its website for over 2 years. They are doing all they can to make certain that people understand what rising rates can do to bond prices. The most current version discusses duration as well so you can estimate how much a given bond or bond fund’s price might drop with a rise in interest rates. It FINRA is working this hard to make the information this public, rest assured it will happen … eventually.

(By the way, the bottom line on this is that the longer the duration, the larger the percent price move for the bond or fund.)

Bottom Line

No one knows when the Fed will move, but the jobs number has put the possibility closer than it was believed to be only yesterday. Similarly, no one knows how much of the impact is already priced into the stock or bond markets and how much remains to manifest. But the rate hike is coming. We need to be prepared for it sooner rather than later.

If you want to discuss your specific situation, please give us a call. We always have time for you!

References:

Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio. FINRA. FINRA.org/investors/alerts. Retrieved June 5, 2015.

Historic interest rates from Yahoo Finance. Finance.yahoo.com. retrieved June 5, 2015.  

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