Bonds are an important part of your overall investment portfolio. Their intended purpose is to smooth out your returns by exhibiting non-correlative behavior with stocks (provided you have chosen a high quality bond portfolio). However, is that always the case and how should you expect your bonds to act under Federal Reserve tightening or Federal Reserve loosening policy environments? Here are two different scenarios and how they may affect your bond holdings:

• What happens if the Fed lowers interest rates

  • cash holdings will suffer in a rate lowering environment while bond prices will rise, with the longest duration bonds seeing the largest increases.

• What happens if the Fed increases interest rates

  • cash holdings will benefit from a rising rate environment;

  • bond funds, while initially falling in value, will eventually reward bond investors with higher yields; and

  • lower quality bonds and bonds with a longer duration will likely suffer greater losses.

If you have questions about what role bonds should play in your portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For more information about bond funds, see my earlier post here.

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