Low interest rates can be challenging for investors. Are you wondering when they’ll rise, especially since the Federal Reserve (Fed) is preparing to increase short-term interest rates again? Or are you concerned about negative interest rates, which spread across many foreign countries earlier in the year?
Long-term government bond rates fell below zero (making them negative) in Switzerland, Sweden, Japan and other countries. That meant those governments and a few companies were able to borrow more money than they’ll repay in the future. Negative rates are part of wider efforts to encourage more borrowing, which should help increase economic growth. But the early results suggest they haven’t helped economic growth as much as expected in parts of Europe and Japan.
In some countries, rates have already increased, and we don’t think they’ll stay negative for a long time. That’s also why we don’t expect negative interest rates in the U.S.
In contrast to negative rates elsewhere, in this country, the Fed thinks the economy is strong enough that it’s planning to raise short-term rates again. It’s in no hurry, suggesting a slow pace for future increases, so rates are likely to rise modestly, staying extremely low. And long-term interest rates declined in the first half of 2016 as rates fell in the rest of the world. The rebound in foreign rates and somewhat higher inflation may push U.S. long-term rates higher, but interest rates look like they’ll rise slightly but remain low for a while.
Even if interest rates rise slowly, as we expect, they’ll still be low. But remember that a diversified and laddered bond portfolio can play an important role in your portfolio. During the two recent stock market pullbacks, bond prices rose when stocks dropped, helping to stabilize the value of portfolios.*
While your bonds may not be delivering the income of years past, they can provide some of your income needs as well as a cushion for your portfolio during inevitable market pullbacks. Consequently, we recommend working with your financial advisor to ensure you have the proper balance of fixed income that aligns with your income needs and comfort with risk.
* Past performance is not a guarantee of future results.
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.