Mar 2, 201510:26 AMTaking Stock
with Nathan Brinkman
Should you be worried about a Federal Reserve interest rate hike?
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After years of record-low interest rates, at some point this year the Federal Reserve is expected to begin raising its target federal funds interest rate (the rate at which banks lend to one another funds they’ve deposited at the Fed). Because bond prices typically fall when interest rates rise, any rate hike is likely to affect the value of bond investments.
However, higher rates aren’t all bad news. For those who have been diligent about saving and/or have kept a substantial portion of their portfolios in cash alternatives, higher rates could be a boon. For example, higher rates could mean that savings accounts and CDs are likely to do better at providing income than they have in recent years.
Also, bonds don’t respond uniformly to interest rate changes. The differences, or spreads, between the yields of various types of debt can mean that some bonds may be undervalued or overvalued compared to others. Depending on your risk tolerance and time horizon, there are many ways to adjust a bond portfolio to help cope with rising interest rates. However, don’t forget that a bond’s total return is a combination of its yield and any changes in its price; bonds seeking to achieve higher yields typically involve a higher degree of risk.