Dave’s Pick: “How Will Bonds Fare As Interest Rates Rise?”

Article originally published by Forbes.com

written by Mike Patton

“When panic struck in 2008 investors sold stocks and rushed into bonds with great exuberance. Over the past five years this extreme cash influx has pushed bond prices higher and yields lower. However, when investors began to sell stocks recently, if the proceeds would have flowed into bonds, then one might have expected bond prices would have risen and yields would have fallen, or at least remained low. In reality, this has not been the case as we have witnessed one of the sharpest and quickest increases in bond yields in decades. Therefore, if you are invested in bonds your concern should be the degree to which bond values will fall if interest rates continue their ascent. In this article, we will address this very important point.

Background

“Over the past 30 years bonds have been in a bull market. This is partly because in October 1981 the U.S. 10 Year Treasury peaked at over 15% and has been on a steady decline since then. To explain, let’s assume you invested $10,000 in a 15%, 30 year bond back then. By midyear 1995 rates had fallen to around 6%. Because bonds have a market value like other investments investors interested in buying your bond would have paid a higher price because it offered a superior yield. Hence, if interest rates decline after you purchase a bond, generally speaking, the value of your “higher yielding” bond would rise. Of course, the reverse is also true.”

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