Ask Terry Questions RISING INTEREST RATES

RISING INTEREST RATES

By Terry Savage on October 05, 2018 | Investments

With interest rates rising, should I buy short-term bond funds?

Terry Says

When interest rates rise, bond prices fall. No one wants your fixed rate 20 year bond if rates have moved higher. So you’ll have to hold it for 20 years until it “matures” and you get your principal back. Or you’ll have to sell it at a slight discount.

The longer the maturity of the bond, the bigger the discount when you sell before maturity if rates rise. (And if you hold it til maturity, you’re still a loser because rates rise to offset inflation –and if you hold that bond for 20 years until it is redeemed, the buying power of your money will be diminished by inflation.

So if you think rates are going to rise, my advice is to stick with short-term bond investments, maturities no longer than 2 years (or even less if you’re going to need the cash within that time).

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