Bond Risk in your Portfolio?
With interest rates near historical lows, investors should be concerned about a possible rate climb and its potential
impact on their fixed income investments. Rising interest rates typically cause existing bonds to lose value.
Academic research offers strong evidence that the bond market is efficient, and that bond prices and interest rates are
not predictable. This uncertainty is reflected in the often-contradictory interest rate forecasts offered by economists,
analysts, and other market watchers.
Even when the experts share similar views on the direction of the economy and credit markets, reality often proves them
wrong. Last year’s Wall Street Journal forecasting survey offers a recent example. Among fifty economic forecasters
surveyed in 2009, forty-three expected the ten-year US Treasury note yield to move higher over the next year, with an
average estimate of a 4.13% yield. Only two respondents predicted rates to fall below 3.00%. The ten-year Treasury
yield was at 2.52% on October 18, 2010 and was lower than that through all of 2011.
Today’s bond prices already reflect expectations for tomorrow’s business conditions and inflation, and these
expectations can change quickly in response to new information. This new information is unknowable. Investors who
accept market efficiency should not be surprised when the credit markets foil the experts. If prices were easy to
forecast, you should find a host of fixed income managers with market-beating returns - but most of them underperform
their respective benchmarks over longer time periods.
Since no one has a reliable method for determining whether interest rates will rise or fall in the near future, investors
should avoid making fixed income decisions based on a forecast, media coverage, or their own hunches.
Instead, the best course of action is to determine the appropriate percentage and types of bonds in your portfolio, and
re-balance to that percentage regularly. Call us if you need help with that.
©2006-2012 Yardley Wealth Management, LLC. All rights reserved.
With interest rates near historical lows, investors should be concerned about a possible rate climb and its potential
impact on their fixed income investments. Rising interest rates typically cause existing bonds to lose value.
Academic research offers strong evidence that the bond market is efficient, and that bond prices and interest rates are
not predictable. This uncertainty is reflected in the often-contradictory interest rate forecasts offered by economists,
analysts, and other market watchers.
Even when the experts share similar views on the direction of the economy and credit markets, reality often proves them
wrong. Last year’s Wall Street Journal forecasting survey offers a recent example. Among fifty economic forecasters
surveyed in 2009, forty-three expected the ten-year US Treasury note yield to move higher over the next year, with an
average estimate of a 4.13% yield. Only two respondents predicted rates to fall below 3.00%. The ten-year Treasury
yield was at 2.52% on October 18, 2010 and was lower than that through all of 2011.
Today’s bond prices already reflect expectations for tomorrow’s business conditions and inflation, and these
expectations can change quickly in response to new information. This new information is unknowable. Investors who
accept market efficiency should not be surprised when the credit markets foil the experts. If prices were easy to
forecast, you should find a host of fixed income managers with market-beating returns - but most of them underperform
their respective benchmarks over longer time periods.
Since no one has a reliable method for determining whether interest rates will rise or fall in the near future, investors
should avoid making fixed income decisions based on a forecast, media coverage, or their own hunches.
Instead, the best course of action is to determine the appropriate percentage and types of bonds in your portfolio, and
re-balance to that percentage regularly. Call us if you need help with that.
©2006-2012 Yardley Wealth Management, LLC. All rights reserved.
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Michael J. Garry, CFP®, JD/MBA, owner of Yardley Wealth Management, LLC,
is an independent Financial Advisor who provides Fee-Only financial planning
services and investment management in Newtown, PA.
is an independent Financial Advisor who provides Fee-Only financial planning
services and investment management in Newtown, PA.
| Address: 41 University Drive Suite 400, Newtown, PA 18940 Phone: 267-573-1019 Toll free: 877-251-4393 Fax: 267-604-9164 mgarry@yardleywealth.net |