Is the Federal Reserve done hiking interest rates? Will they raise rates another .25-.50 basis points? What does this mean for the economy and your investments? In times of uncertainty there is opportunity.
When the Federal Reserve nears the end of it’s rate hiking campaign bond yields typically peak and eventually fall over the course of time as the Federal Reserve lowers their overnight lending rate. You probably already know bonds pay a fixed coupon rate, but that’s not the only way they generate a return. Bond prices move inversely of interest rates. Thus, if rates go down, bond prices go up and vice versa.
Historically the best time to buy bonds is when the Federal reserve is nearing the end of its rate hiking campaign. Two main reasons 1) you’re locking in a high coupon rate for the life of the bond 2) the price of the bond may appreciate when the Federal Reserve lowers interest rates. Thus, if you lock in a coupon of 7% and the Federal Reserve lowers rates, you could experience bond price appreciation in addition to the coupon.
Bonds present a great opportunity for someone who is ready to put cash to work or diversify a portion of their stock holdings. Money market funds may underperform bonds when interest rates are lowered. Thus, one of worst times to be in cash is when interest rates are lowered. Historically, bonds have experienced double digit returns in the 12 months following the Federal Reserve reaching its peak rate. The chart below shows the historical performance of bonds when interest rates peak and fall.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.