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If you're buying on credit or shopping for a mortgage, low interest rates can be helpful. But if you're buying a bond, it's a different story. With global growth slowing and market uncertainties rising, interest rates are likely to stay low for some time.
We're seeing two reasons for this:
Here are five tips for bond investors today:
Other factors are important to consider, however. When their rates are locked through maturity, certificates of deposit (CDs) can act like bonds, providing a predictable income stream. The variable yield of a money market fund (MMF), however, can change quickly as underlying securities mature and are reinvested at market rates.
CDs tend to be more valuable when rates are falling, and MMFs are higher-yielding when rates are rising. Because rate fluctuations are hard predict, your time horizon and funding needs should determine where you put your cash.
Build a bond ladder by buying fixed-income securities across a range of maturities. Each rung of the ladder works to support an upward climb for your total portfolio. This can help ensure your portfolio reflects your comfort with risk even when rates fluctuate.
Though low interest rates tend to be good for equities, this doesn’t mean your bond portfolio has to suffer. Check with your financial advisor to help ensure you’re maintaining a healthy mix of stocks and bonds, which will help keep your portfolio on track in all types of rate environments.
Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.
You must evaluate whether a bond or CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.
Including callable bonds may increase the interest rate risk of a bond ladder. Bonds may be called prior to maturity, which could result in lower yields with new investments.