Investors realize that the stock market will have ups and downs but what about the bond market? You have likely heard that bonds are safe and government bonds are very safe. “Safe” usually gets substituted for “less volatile” and while bonds are typically less volatile than stocks, they are not immune from market fluctuations. Case in point, in the first quarter of this year the Bloomberg U.S. Bond Index returned minus 5.5%, its worse performance since 1980. Add to that a decline of another 2.4% this month and you get a drop of almost 8% in less than four months.
This type of volatility surprises most investors unless you understand that bond returns move inversely to interest rates. With interest rates at record low levels and inflation reaching record highs, the Federal Reserve began increasing rates to slow inflation, which is pushing bond prices down.
While it isn’t possible to eliminate all risks associated with rising interest rates, it is possible to lessen the negative impact to a portfolio. A couple of those strategies include investing in short-term bonds that mature in one-year or less and investing in floating-rate bonds that pay higher interest as rates rise.
If you have questions about your portfolio allocation, call our office to schedule an appointment.