That bond bubble burst we’ve been warned about for the past several years may finally be happening.
With interest rates creeping up, bond prices are starting to decrease. And that may signal problems for bond fund owners.
That’s because bond prices are directly correlated with interest rates. When rates fall, prices rise. And when rates rise, prices fall, causing existing bond values to decrease.
Bonds are basically loans given by a company or the government. Payments are made to investors based on the interest rate at the time they purchased the bond. After the 2008 Great Recession, many investors gravitated to the potential stability of bond funds.
That trend has continued as interest rates have been exceptionally low for the past several years. To prevent the Great Recession from turning into a depression, the government pushed to keep interest rates low. Those efforts proved successful in helping to prevent a major economic dive and driving the bond market soaring upward.
But many predicted it would not last.
They anticipated that the bubble would ultimately collapse, and a strong economy would push interest rates up and bond prices to drop precipitously.
That prediction is now starting to be realized.
The reasons: after a period of historic calm, the stock market is in a period of correction and showing renewed volatility. That instability is contributing to concerns of inflation and interest rate hikes for the first time in years.
What should you do if you own bonds?
- Do not panic. As natural as it is, panicking often leads to impulsive decisions. Investing requires diligence, patience and a long-term view. Most people are not high-risk investors, but rather building a nest egg over several decades.
- At the same time, do not ignore market shifts. Review your portfolio. Make sure it is still balanced. Adjust and rebalance as necessary. Your investment risks should reflect your changing needs based on your age and how close you are to retirement. The closer you get to retirement, the less risky you should be.
- Evaluate the type of bonds you have. Bond durations typically range from 2-15 years. Short term bonds, meaning those with a short duration, are less at risk of devaluation than long term ones.
- Meet with your financial advisor. Each person’s case is unique. Most often, staying the course is the best option, especially if you have a carefully-crafted investment portfolio that has been designed with fluctuations in mind. The best person to help you determine the next course of action is your personal financial advisor.
At Silverman Financial, we are continually monitoring your portfolio’s performance against changes in the markets. We invite new people to schedule complementary initial consultations to create lasting retirement roadmaps with financial security and longevity.