investor looking to the future

Do Not Expect Significant Rates Of Return From Bonds

With interest rates still very low and likely to rise, investors should not expect a significant rate of return from bond holdings in 2016.

Now that the U.S. Federal Reserve is raising rates, bond investors are being confronted by their greatest fear. Historically speaking, the value of bonds will drop when rates rise, simply because their yields are less attractive than those of newly issued bonds; and even hard assets for that matter. In fact, if rates do rise even modestly, it WILL hurt bond prices and negatively affect the total return for bond investors.

barclays says curb expectations

“Curb your expectations.” – Barclays Investment Bank

Analysts believe that the Federal Reserve’s policy has not just been keeping borrowing costs down in the bond market, it has also been an important contributor to high stock market prices, as well as the surprisingly speedy recovery in the U.S. housing market. The truth be told, too much of a rise in rates will create problems that extend beyond bonds. The impact of higher rates could hurt the economy, which would in turn place pressure on rates.

“If it becomes clear that the business cycle is not facing an imminent recession in developed markets, we think spreads should rally modestly, helped by accommodative central banks outside the United States”. – Barclays Strategists Annual Outlook [2016]

Another point of concern for many analysts and savvy investors is that the central banks in Europe, Japan and elsewhere, are actively pumping stimulus into their economies to drive growth; the Federal Reserve is moving in the opposite direction. Let’s not discount that long-term rates depend not just on where the U.S. Federal Reserve is heading, but also on inflation.

Economists have forecast that once the Federal Reserve begins its cycle of rate hikes, expecting anywhere from two to four rate hikes based on inflation expectations and financial conditions, the bond bubble will burst.

Considering the risk that both Federal Reserve rate hikes and inflation pose, in conjunction with the recent market volatility that is adversely affecting the daily price of bond holdings, it is recommended that investors maintain a very cautious approach to investing in bonds; and consider introducing alternative investments to their portfolio to limit their exposure to the current financial and economic factors.

Published by

Sarah Paige Andrews

I am an independent investor with an affinity for alternative investment offerings. To educate myself, I research and report on nontraditional options.