Today’s rising interest rates and inflation have made it a very unstable time to invest in bonds.
What used to be the safe, boring part of your retirement portfolio is now experiencing volatility that hasn’t been seen in a long time.
During this live webinar on March 25, 2022, we talked about why bonds don’t do well when interest rates go up, what types of fixed income investments are most safe from inflation, and how this drop compares to other times when inflation and interest rates went up.
A fixed-income security is a bond. Bonds let governments and companies sell some of their debt to investors. Interest rate risk is a threat to bonds with a fixed interest rate. If you buy bonds, you should know how interest rates could affect your investment.
Inflation is when the prices of goods and services go up over time. It could hurt people who invest in bonds in two ways. One is clear, and the other is not so clear. You should learn about both to make smart investments.
What really is inflation?
Inflation is the increase in prices for all goods and services in an economy. Inflation has the effect of decreasing the value of money. When inflation rises, your purchasing power decreases.
Inflation and Policy of the Federal Reserve
The Federal Reserve (the Fed) is the central bank of the United States. It determines monetary policy and controls inflation. The Fed may choose to raise short-term interest rates if inflation increases. The objective is to limit credit demand and prevent the economy from overheating.
When the Fed raises short-term rates, or when it is anticipated that it will do so in the future, intermediate and longer-term rates tend to increase as well. Since bond prices and yields move in opposite directions, an increase in yields results in a decrease in bond prices. This results in a decrease in the value of your fixed-income investment.
The value of your long-term investments will constantly be eroded by the silent thief of inflation. With some planning, you will be able to stay a step ahead of it.The Conclusion
The value of your long-term investments will constantly be eroded by the silent thief of inflation. With some planning, you will be able to stay a step ahead of it.