Rising Rate Portfolio Prep
Interest Rates 1970-2010, as of 12/17/2010
When interest rates go up, the price of bonds goes down.
Take a look at this graph of interest rates going back to 1970. Rates are at 40 year lows, aside from a short lived blip during the 1st quarter of 2009 when the economy nearly halted.
In the short term, it is possible that rates stay here or go down more. But in the long run an increase in rates is inevitable, with the enormous deficit and the amount of money being printed. Once the economy starts to pick up steam, we will see a reversal in rates and UP will be the new long term trend.
If you hold fixed income investments such as bonds, you need to take a look at the duration in your portfolio. Duration is different than maturity– this is an important distinction. Duration can be used to calculate the effect each 1% increase in interest rates will have on your investment.
The economy is still soft, and the fed intends to keep rates low.. for now. Once the economy picks up however we may see a vicious cycle of rate increases and the subsequent decrease in the price of bonds.
Duration matters. Now is a good time to evaluate your investments and prepare for the future. There are steps you can take to reduce the interest rate risk in your portfolio. Call us today to discuss appropriate strategies.
