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Should You Be Concerned About Rising Interest Rates?

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

April 3, 2018

With interest rates spiking unexpectedly in early 2018 and the Fed poised to continue raising interest rates throughout 2018, some bond investors have become very concerned about experiencing negative returns in their bond holdings. While rising rates will have a negative impact on the price return of a bond investment, this impact can be offset by the positive impact of coupon income.

A rising rate environment isn’t necessarily bad for bond investors in the long run because it will lead to higher coupon payments in the future. As interest rates rise, investors will demand higher coupon payments from newly issued bonds. Also, coupon payments from existing bonds can be reinvested in these newer, higher yielding bonds.

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Rising Interest Rates The Fed Bonds

What is the Federal Reserve?

August 9, 2017
The Federal Reserve (Fed) met on July 25 and 26 with little fanfare, since they did not end up raising interest rates. In a statement, the Fed said the job market continues to strengthen, but inflation remains somewhat of a concern. Inflation metrics have fallen below the 2% threshold the Fed considers healthy, and as such the central bank will be “monitoring inflation developments closely.” The Fed gets quite a bit of media attention, and it got us thinking: for many normal investors and retirees, the Federal Reserve is probably an institution shrouded in mystery. What is the Federal Reserve? How did they come into existence? Are they as important as everyone says they are?1 There is no way we can cover all of that ground in this post, but we figured offering four little-known facts about the Federal Reserve could at least help readers get to know the institution a bit better. Here they are: [+] Read More

JP Morgan Evaluates Implications of an Interest Rate Hike

June 15, 2017
After a brutal recession and a painfully slow recovery, the U.S. economy no longer needs emergency measures of support from the U.S. Federal Reserve. Policymakers began the process of normalizing monetary policy at the end of 2015, and although the Fed is raising rates because the economy is healthier, the prospect of higher interest rates has created consternation and angst among some investors. While the Fed’s own projections are for a slow and gradual rate hike cycle, futures pricing suggests that the market thinks interetst rate hikes may be a bit slower. Although the gap between the Fed’s projections and the market’s view has narrowed, there is still room for surprises and volatility. The key thing to watch will be how market expectations adjust to the Fed’s new forecasts, as a Fed that hikes more quickly than the market expects could lead to upward pressure on the U.S. dollar and a de facto tightening for the U.S. economy. Read the entire commentary here. [+] Read More

How Will Rising Interest Rates Affect Your Investment Portfolio?

March 30, 2017
On March 15, the Federal Reserve raised interest rates for the first time in 2017. Federal Reserve Chairman Janet Yellen moved the benchmark interest rate a quarter percentage point higher, to a range of 0.75% to 1%, and the Fed indicated that the market could expect two more rate increases this year.1 So what does this all mean for you? The answer depends on whether you look at it from a standpoint of being a borrower, a saver, or an investor. Later in this post, we’ll take a look at all three scenarios. But first, here’s a bit of background as to what an interest rate increase actually is, and why they occur. [+] Read More

Did You Know? Interesting Facts about the Federal Reserve

December 1, 2015
For all the media coverage garnered by the Federal Reserve (Fed) and the potential for interest rate hikes, you rarely encounter basic explanations of how the Fed actually functions. Simple questions, like: How and when was the Federal Reserve formed, and for what reason? How are meetings structured/scheduled, and what are the guidelines for making decisions? The Federal Reserve is arguably the most watched financial institution in the world, yet we’d venture to say that even many expert advisors are unaware of some of the basic ins-and-outs of how it works. We’ll cover a few of those here. (In)Frequently Asked Questions about the Federal Reserve How and when was the Federal Reserve formed, and for what reason? [+] Read More