With interest rates expected to continue climbing, what will happen to your bonds?

Posted at 5:03 PM, May 12, 2022
and last updated 2022-05-12 17:03:06-04

The Federal Reserve recently raised interest rates by another half of a percent, and these rising rates are likely to continue climbing.

Financial expert Carl Carlson, CEO and founder of Carlson Financial, said if you have bonds in your portfolio right now, you should be careful.

According to Carlson, if you owned an exchange traded fund that had 10 to 20-year US treasuries in it two years ago, today the value of your investment in that ETF is down about 25 percent — maybe even a little more.

Now, the US Treasuries didn't go bad, but the the rate that the Fed is charging is now increasing. So whenever interest rates increase, the value of bonds decreases.

Carlson said bonds and interest rates tend to have an inverse relationship.

Over the last 30 to 40 years, interest rates have been declining. So when interest rates go down, the value of bonds goes up.

As interest rates have been going down, everyone's bonds have been pretty steadily increasing in value. That helps offset the stock market when the market's going down.

When the opposite happens, when interest rates start going up, then the value of the bonds start going down. So now we're seeing portfolios and the stock markets going down — and bonds are going down too.

Carlson said you really need to get yourself in a position where you're not holding a lot of bonds, and especially long-term bonds in your portfolios. Instead, consider a safety that's not tied directly to your stock market investments, like a fixed indexed annuity.

"People should probably start studying that product a little bit in that one, you cannot lose money. If the market goes down, you're not losing money. You're only not getting an interest credit. But if the market goes up, and it's indexed to something in the stock market, like the S&P 500, then you get the upside," Carlson said. "They usually limit it. Maybe you get half of the upside in the S&P 500, but you have no downside. So that will gives you safety, nice safety, and then a potential nice upside under rate of return."