Bonds have been in the headlines lately and much is being said on the topic as we see the impact of rising rates on our bond portfolios. As I mentioned last month, we should be spending time on this important market segment. The US bond market is three times the size of the US equity market, and the global bond market is over $90 trillion.
As we begin to see bond interest rates increase, we also see bond prices decrease. You may want to ask the question, “Why are we holding bonds if we think the prices, and market value, will be decreasing?” Good question! Here is the good news. For the bond investor, rising interest rates improve intermediate to long-term bond returns over time. As interest payments and maturing bond proceeds come into the portfolio, new bonds are purchased at higher interest rates. Again, over time, a well-structured bond portfolio resets to prevailing interest rates. In the short-term, there may be modest declines in market value, but in the long run, the results are positive for the portfolio.
We know it is difficult to see declines in certain segments of our portfolios. But this is where discipline comes in. It takes discipline to hold good, solid assets at a time when they are out of favor. It takes discipline to keep moving toward the long term goal when the short term headwinds try to push us off course.
As always, we welcome your input. If you have any comments or questions or just want to weigh in on this matter, please feel free to contact us or leave a message below.
Ann P. Wiesbrock, CFP®