Bonds Beware – Do Your Research

Own bonds? In case you don’t closely follow the markets, bond yields recently reached the lowest level in decades. When yields drop the price of a bond rises. Conversely, when yields rise, the price of a bond decreases. Central bankers around the world have kept interest rates low for a very long time under the belief that low rates would spur investment activity. These low rates have led to years of rising bond prices. It now appears that the long bull market in bonds has either ended or is very near the end. The U.S. Federal Reserve just raised rates a quarter point in December 2016 and indicated as many as three more possible rate hikes in 2017. Rising interest rates will mean that existing bonds, paying out at lower rates of interest, will decline in value. This is due to investors wanting the newer bonds paying higher rates.

If president elect Trump is successful with his tax cuts and infrastructure spending, inflation could rise. Interest rates should follow suit to keep inflation under control, and bond prices will continue to drop. All of this sounds pretty bad if you are a long term bond holder. What should you do? First, steer clear of bonds with maturities longer than 3-5 years. Second, consider alternatives to bonds when investing for income: certain real estate investment trusts, Treasury Inflation Protected Securities, or TIPS, may be a good place to park some funds, as would be preferred stocks. Lastly, consider investing a little more in equities, preferably those whose prices are below a company’s intrinsic value.

Be sure to do your research and understand what you are investing in.

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