In the Bond Market, Good Things Come to Those Who Wait
A few weeks ago the Federal Reserve met and decided to raise short-term interest rates by 25 basis points (a basis point is equal to 0.01%). Looking ahead to 2017, the bond market has already priced in additional interest rate increases. If the economy continues to improve additional rate increases will likely occur. The price on bonds already issued will decline. While higher interest rates have a negative impact on bond prices in the short-term, higher interest rates also means more income will be paid from new bonds being issued. This means higher total returns for bond investors.
Why does this matter?
Making decisions (buying and selling) based on what is happening to your investments on a day-to-day basis is not a good strategy. Remember the role bonds play in an investment portfolio. They are used to provide income and safety in times when stocks are not performing well. Another name for bonds is “fixed income.” This is because if you hold a bond to maturity, your return on investment is predetermined. Patience, when it comes to the bond market, is a virtue. Reinvesting bonds that mature into new bonds at a higher rates means higher returns for bond investors.
Our advice is to be patient. Good things come to those who wait. In the meantime, should you have any questions or are seeking investment advice, feel free to contact us.