The Upside of Buying Individual Bonds
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With interest rates at such low levels for so long, many conservative investors have been struggling to find fixed income solutions that will deliver the yields they need to keep their long-term financial plans on track. With interest rates rising this year, investors are even more confused about what to do. Although conditions are far from optimal for heavily overweighted fixed income investors who are seeing their statements down as much as 10-15% year to date, things are not as bad as they seem.
At least they’re not if we’re talking about investors holding individual fixed assets, such as individual bonds, CDs, or preferred stocks.
It seems counterintuitive, so let me explain. It’s like a seesaw. When interest rates go up, the price of bonds go down, and vice versa. Hence, when the Fed raises rates, as it has been doing to fight inflation (the 75-basis-point hike on June 15 was the largest boost since 1994 with more to come), the price of bonds go down. The face value of the bond doesn’t change, but what the market is willing to pay for that bond does. That’s why many fixed income indexes are down 10-15% so far this year, and why so many investors, especially conservative income investors or those who are highly risk averse, have been panicking when they get their monthly statements.