By Scott Ford, CEO, Founder & Wealth Advisor
If you’ve perused the news lately, you may have seen that the U.S. equities market is in a correction. While this shakeout in equities has made headlines and paused retail investors, Fixed Income has had its own shake up.
On February 2, the 10-Year U.S. Treasury yield reached 2.85%, breaking a consistent trend line we’ve seen since 1990. This could be a sign of a potential bear market approaching for longer-term fixed income.
Additionally, the U.S. Treasury 30-year Yield Index TYX reached 3.125% on February 5-its highest level since March 2017-before reversing and hitting 3.050% the following day. And we also saw the U.S. Treasury 5-year Yield Index FVX reach its highest level in more than five years before taking a dip.
Is Your Bond Portfolio Outdated?
If we take a look at that graph above, my question for you is: what were you doing when this trend line started? 1990 was quite a while ago!
While most of us would rather not look back on what we were wearing or what our hair looked like during that time period, if you are a Fixed Income investor, it’s time to review your bond portfolio and see if it looks like it did in 1990.
With rising interest rates and almost certainty based on comments of the Fed over the past year, the age of free (or almost free) money seems to be over. More importantly, the age of a simple buy and hold strategy for bonds seems to be facing some headwinds.
What May Happen to Bonds
There is an inverse relationship between bond prices and interest rates. As interest rates rise, bond prices fall. This is because newly issued bonds have higher rates of return than older bonds, reducing the demand for the older bonds. However, different kinds of bonds are affected differently. The term to maturity is the biggest differentiator in bond behavior when facing rate hikes.
Long-term bond are most affected by a rate hike. Demand for long-term bonds drops quickly as rates go up. Few investors want to be locked into a low rate for up to 30 years when higher rates are expected in the future.
Short-term bonds aren’t nearly as sensitive to rising interest rates because they mature so quickly. Investors know that the bonds will mature rapidly and they will be able to reinvest their capital at higher rates on a regular basis. In fact, sometimes rising rates create an increased demand for short-term bonds as investors shy away from long-term ones, waiting for rates to rise.
Bonds That Mitigate Interest Rate Risk
As explained, long-term bonds are the riskiest in rising rate environments. To mitigate rate risk, it may be appropriate to move to short-term and floating rate bonds. Short-term bonds are much less volatile and can even experience increased demand when rates rise. Floating rate bonds have rates that adjust periodically, so they do not carry the risk of being locked into a low rate for a lengthy period of time.
Next Steps to Take
Especially in rising rate environments, it is important to have a well-diversified portfolio. Every investor should work with an experienced financial professional to ensure that their portfolio is prepared for Fed rate hikes and the political uncertainty that our world is facing today.
It you haven’t reviewed your fixed income portfolio in a few years, now is the time. At Cornerstone Wealth Management Group, we believe in the strength of a well-diversified portfolio, unique to your specific time horizon and risk tolerance. We follow a rigorous investment management process and work with top investment management companies to provide high quality financial solutions to address each client’s specific goals.
You can learn more by downloading our free report, Investment Process. Or, to review your portfolio and any changes that may need to be made, schedule an appointment by clicking here now, call (301) 739-8505 or, email firstname.lastname@example.org.
Scott Ford is CEO, Founder and Wealth Advisor of Cornerstone Wealth Management Group, serving entrepreneurs, business owners, executives, and their families. The firm specializes in business liquidity strategies and SBA financing strategies. It is Scott’s mission to help his clients pursue financial freedom and live a balanced and fulfilled life.
Scott is a Wealth Advisor and Registered Financial Consultant (RFC). He was recognized as one of the 20 Rising Stars of Wealth Management by Private Asset Management Magazine in 2008 based upon assets managed of $1 million or more per client. Since 2005, Scott has been an active financial technical analyst.
Clients often choose to work with Scott because of his experience with the challenges business owners and executives face as well as his firm’s disciplined process. His personal and proactive approach is designed to bring clarity and simplicity to the complex issues of financial management. For over 20 years, he has been helping his clients define and pursue their own unique version of “True Wealth.”
Scott is the author of three books: Financial Jiu-Jitsu: A Fighter’s Guide to Conquering Your Finances, The Widow’s Wealth Map: Six Steps to Beginning Again, and the New York Times Bestseller, The Sustainable Edge: Fifteen Minutes a Week to a Richer Entrepreneurial Life.
He and his wife, Angie, reside in Hedgesville, WV and have two wonderful children as well as a dog and a cat. In addition to spending time with his family, Scott is a voracious reader and enjoys woodworking, Brazilian Jiu-Jitsu, golf, hunting, permaculture and beekeeping; basically anything outdoors.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
A diversified portfolio does not assure a profit or protect against loss in a declining market.