Thursday, July 30, 2015

When Interest Rates Rise, Interest Rates May Fall

Be careful what you read in the press and be careful about assumptions. Remember what Felix Unger showed us about the word "assume". Often, when we hear that the Fed is going to raise interest rates, we assume that interest rates, all across the yield curve, will rise.

The Fed has been hinting at higher interest rates since at least January 2014. As you can see, Fed Funds rates have risen very slightly over the 1/2014 until 7/2015 time period:

Interestingly enough, 5 year Treasury Note rates have not risen at all and 30 year Treasury Bond rates have actually fallen:

What will happen to the bonds in your portfolio if rates continue to rise? (And most certainly they will). Well, it depends on the maturity of the bonds and the type of the bonds. Avoid assuming that because you own bonds in your portfolio that they will automatically fall in price as the Fed increases rates. Be sure you are working with a group that has a bond background, and be sure your bond portfolio is structured to be as resilient as possible to rate increases.