This is the latest article written by Kevin McNab published in ColoradoBiz Magazine. Many investors are going to be surprised when they see a decrease in their bond funds. This article touches on why a bond fund will decrease in value and some of the alternative assets classes if an increase in interest rates is expected.
As investors saw their nest egg deteriorate in the great recession of 2008, many moved their money into bond funds as a safe haven to protect their assets from decreasing stock prices. During this time, interest rates decreased to near zero and continued to remain at record lows. As a result, bond funds flourished. Investors became comfortable with bond returns even as they missed out on the continued stock market recovery.
The Federal Reserve already took action to raise the Fed Funds rate last December. Now with the anticipation of two more rate hikes by the end of this year and signs of inflation, many experts are predicting an increase in interest rates. As Warren Buffet said last year in an interview with CNBC, “I think bonds are very overvalued.” Although counterintuitive, when interest rates rise, the price of bonds decrease. As the price of bonds decrease, investors will see depreciation in their bond funds. In other words, they will lose money. So what should investors do in a time of rising interest rates?…READ MORE!