Bond Performance During Periods of Increasing Interest Rates

Short term bonds bigstock 192321925With interest rates now rising and the Fed expected to continue to raise it’s Fed Funds rate by 25 bps at each of the next few quarterly meetings, we expect treasury yields to increase as well. Generally, higher quality longer-duration bonds perform poorly when interest rates rise, however some types of bonds tend to perform relatively well.

This blog post nicely outlines a strategy that Broad Reach Wealth Management is using for the bond positions in investment portfolios. In summary, based on historical evidence, we expect short duration bonds to outperform longer duration bonds and bonds with higher yields due to higher credit risk to outperform lower yielding, higher quality bonds.

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Ultra-Short-Term-Bonds Reduce Volatility While Providing Income

Short term bonds bigstock 192321925When interest rates rise, bond prices fall. The extent of the fall in price is determined by many factors, one of which is time to maturity. The longer the time to maturity the more volatile the bond’s price will be. Ultra-short-term bonds have proven to be relatively stable in times of rising interest rates. Combining ultra-short-term bond strategies with floating rate notes, which provide the potential for increasing income as interest rates rise, can help reduce volatility of an investment portfolio overall. This has become a popular investment strategy that financial advisors use when interest rates are rising.

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Shape of the Yield Curve May Be Best Economic Indicator

bigstock Stock Market Analysis 570645Of all the indicators analysts watch to guage where we are in the economic and market cycle, the bond market - and more specifically the shape of the yield curve - gets it right more often than any other.

The Federal Reserve Bank of San Francisco recently noted "Every recession in the last 60 years was preceded by a negative term spread, that is, an inverted yield curve." The current shape of the yield curve is telling us what we already know: that we are not at the end of the cycle but are getting closer. The cycle likely still has room to run. 

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