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Is It Time to Bail on Bonds?

If you've noticed interest rates slowly creeping up, you're probably wondering what that means for you.

The answer is that it depends on where you are in your life.

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For consumers, a decision by the Federal Reserve to raise rates can influence the cost of car loans, student loans and even the interest on your credit cards. If you're preparing to buy a home, higher rates could affect your house payment, eating away at what you can afford. And if you have been considering refinancing an existing mortgage, you already know it's getting tougher to lock in a good rate.

The Ups and Downs of Interest Rates

Although today's interest rates are still low by historical standards, they're now higher than many younger consumers have seen in their adult lives.

But the thing is, what's happening is normal. Interest rates have historically gone through long-term cycles, where they tend to go up for about 20 years, and then move down for another 20.

If you think back to the early and mid-1980s, interest rates were extremely high. Mortgage rates were 13% to 14%, and you could get a five-year CD-yield of 12% or higher.

From there, interest rates trended downward for about 20 years, which also coincided with a boom in the housing market, because buyers could get more for their money.

That was followed, of course, by the market crash and the housing bubble burst. In response, the Fed purposely forced down interest rates -- and we've lived with those low rates for quite a while.

Hang Onto Your Portfolio: Rates Are on the Upswing Again

Now we're beginning a rising-rate cycle, where interest rates are expected to gradually go up over time. Rates are at their highest level since shortly after the bankruptcy of Lehman Brothers in late 2008. And many people are starting to notice the impact on their pocketbooks.

What they also should be paying attention to is the effect on their portfolio.

That's because most people build their nest eggs around a mix of stocks and bonds -- stocks for growth and bonds for safety (or, at least, less risk than stocks). But in a rising rate environment, bond prices tend to go down. After all, why would an investor pay face value for an older bond when he or she could invest in a new bond and earn interest at a higher rate?

That's a hard lesson for investors who came to depend on what seemed to be the natural buoyancy of bonds in the 1980s, '90s and early 2000s.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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