• If Interest Rates Rise, What Happens to Bonds?

     

    Investors in longer-term Treasuries could really be punished.

     

    Provided by MidAmerica Financial Resources

     

     

    Are bond investors facing the possibility of major losses? Recently, bond yields have climbed. From November 1-23, the 2-year Treasury yield went from 0.83% to 1.12%, while the yield on the 10-year note rose from 1.83% to 2.36%.1

     

    Quality bonds have a place in a portfolio, but many investors are moving their money elsewhere. They see a federal stimulus ahead in 2017, one that could potentially strengthen the economy and lead the Federal Reserve to gradually tighten interest rates. Assuming that happens and appetite for risk remains strong, what will happen to bonds and bond funds when rates begin to climb?1,2,3

     

    The impact of rising rates will vary. Bonds and bond funds are different animals; some might even call them different asset classes.

       

    In a rising-interest-rate environment, bond fund investors commonly see principal values decline until rates level off or dip again. The more intermediate-term and long-term bonds a fund holds, the bigger the hit it may take. A diversified bond fund will reinvest interest payments into new bonds with higher coupons, however – meaning investors will see larger returns with time.2,3

      

    Long-term bonds tend to be hit harder by higher rates. They may lose market value, but eventually the higher rates will result in extra income for the patient investor.2,3,4

       

    How about short-term and intermediate-term bonds? Some analysts warn against purchasing short-duration Treasuries and municipal and corporate bonds, contending that these debt securities might be hurt the most should the pace of rate hikes quicken. Others disagree.2,3,4

       

    Higher rates have not always imperiled the bond market. Before December 2015 (when the Fed decided to raise rates again), the economy had seen six rising interest rate environments in 40 years. Those periods lasted from two to five years, with T-bill rates rising between 2.3-11.9%. In those six instances, the total annual return for the Barclays U.S. Aggregate Bond Index (the S&P 500 of the bond market) ranged from 2.6-11.9%, with most of the total annual returns at between 4-6%. In short, no disaster for a bond investor.2,4

       

    Still, if the federal funds rate rises 3% over a period of a few years, a longer-term Treasury might lose as much as a third of its market value as a consequence – and if bulls happen to run on Wall Street with only brief retreats between now and 2025, how attractive will a short-term or intermediate-term Treasury be?

       

    What if you want or need to stay in bonds? Some bond market analysts see merit in exploiting short-term bonds with laddered maturity dates. The trade-off: accepting lower interest rates in exchange for a potentially smaller drop in the market value of these securities if rates rise. If you are after higher rates of return from short-duration bonds, you may have to look to bonds that are investment-grade, but without AAA or AA ratings.2,3,4  

      

    If interest rates begin heading north soon, exploiting short maturities could position you to get your principal back in the short term. That could give you cash, which you could reinvest as interest rates presumably go up further. If you primarily see pain ahead for bond owners, you could consider limiting yourself to small positions in government bonds, investment-grade corporate bonds, and bond funds with durations of 10 years or less.2,3,4

      

    Bonds still belong in the big picture. In a bull market, putting money into an investment returning 1.5% for 10 years may seem nonsensical. It may make more sense in light of the goal of portfolio diversification and the need for consistent returns.3,4

     

    If interest rates rise continually during the next few years, current owners of long-term bonds might find themselves losing out in terms of their portfolio’s potential. On the other hand, bonds have never lost half their value; stocks have.

          

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

    Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

         

    Citations.

    1 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield [11/23/16]

    2 - thestreet.com/story/13393037/1/how-to-invest-in-bonds-as-interest-rates-start-rising.html [12/20/15]

    3 - money.cnn.com/2015/04/29/retirement/bonds-investing/ [4/29/15]

    4 - marketwatch.com/story/how-your-bond-portfolio-can-survive-higher-rates-2015-04-23 [4/23/15]

     

     

  • Could You Improve Your Personal Finances Today?

     

    Simple decisions & new habits might lead you toward a better financial future.

     

    Provided by MidAmerica Financial Resources

     

     

    In life, there are times when simple decisions can have a profound impact. The same holds true when it comes to personal finance. Here are some simple choices you could make that may leave you better off financially – in the near term, the long term, or both.

      

    Use less credit. Every time you pay with cash instead of credit, you are saving pennies on the dollar – actually, dimes on the dollar. At the start of December, the average “low interest” credit card in America charged users 12.45%, the average cash back card 17.15%. If you want to see your bank balance grow, try consistently paying in cash. There is no need to pay extra money when you pay for something.1

     

    Set up automated contributions to retirement plans & investment accounts. By automating your per-paycheck salary deferrals to your workplace retirement plan or your IRA, you remove the chore (and the psychological hurdle) of having to make lump-sum contributions. You can bolster invested assets with regular inflows of new money, without even thinking about it. Often, arranging these recurring account contributions takes 20 minutes or less of your time.2

     

    Bundle your insurance. Many insurers will give you a discount if you turn to them for multiple policies (home and auto, possibly other combinations). This may help you reduce your overall insurance costs. 

     

    Live somewhere less expensive. Sure, it takes money to move, but that one-time cost might be worth absorbing, especially if you can perform your job anywhere. A look at the December United States Rent Report at ApartmentList.com reveals that the median rent for a 1-bedroom apartment in Los Angeles is $1,900. The median rent for a 1-bedroom apartment in Spokane is $630. What is the median rent for a 2-bedroom apartment in Boston? $3,200. How about in Fayetteville, North Carolina? $700.3 

     

    Look into refinancing your largest debts. Perhaps your student loans could be consolidated. Perhaps you could qualify for a refi on your mortgage (while rates are still low). Both of these moves could free up money and leave you with more financial “breathing room” each month. 

     

    Spend less money on “stuff” and more money on yourself. Many people associate possessions with well-being – the more “toys” you have, the richer your life becomes. That kind of thinking can quickly put you deep in debt. You may find yourself living on margin as your “toys” depreciate.

     

    A wise alternative: pay yourself first and direct more of your income into retirement or savings accounts. Or if you like, use some money you would normally spend on creature comforts to attack your debt. Instead of simply entertaining yourself today, make money moves on behalf of your financial future. Too many people give their financial future little thought, and they may be in for a shock when they reach retirement age.

     

    We all want to splurge now and then, but try spending money on memorable experiences instead of flashy items – you may find the former many times more valuable than the latter. 

     

    Forgo several purchases a month and see what happens. A recent SunTrust bank survey found that roughly a third of U.S. households earning $75,000 or more live paycheck to paycheck. Earlier this year, Money noted that the average household credit card balance was nearly $16,000. In short, people are spending too much.4

     

    Some expenses are obligatory, others spur-of-the-moment and unexamined. Pause and think before you buy something; do you really need it? If you separate your needs from your wants and say no to several of them, you may find yourself living a simpler life with less debt and more cash.

     

    Spend less than what you make, invest and save some of the difference – this is the classic path toward improving your financial situation.    

             

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

    Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

         

    Citations.

    1 - bankrate.com/finance/credit-cards/current-interest-rates.aspx [12/1/16]

    2 - forbes.com/sites/robertberger/2016/05/14/20-ways-to-improve-your-finances-in-under-20-minutes/ [5/14/16]

    3 - apartmentlist.com/rentonomics/national-rent-data/ [12/1/16]

    4 - time.com/money/4320973/why-you-are-poor/ [6/6/16]