The Endless Battle Between Bonds, Interest Rates, and Your Portfolio

There’s been a lot of rumbling in the news lately about the bond market.

With interest rates recently bouncing off of historic lows, the economic community is in general consensus that the end of a more than 30-year bull market for bonds is near.

While no one can predict the future of any investment option, there are signs of a sea change for the bond market.

Interest rates and bond prices have an inverse relationship. When one goes up, the other goes down. When interest rates rise, bond prices tend to fall. And though the last several years have seen nearly unprecedented low interest rates, there may be a shift underway.

10-Year Treasury Bond Hypothetical

Many experts believe rates will begin increasing sooner rather than later. There are many factors that may cause this to occur, including changes in the monetary policy of the Federal Reserve, as well as improving economic conditions and rising inflation expectations.

That’s why now may be a good time to consider diversifying your investments, especially if bonds factor significantly in your portfolio. This doesn’t mean abandon bond investments. Instead, you may want to consider other strategies that use different kinds of asset classes to help produce income and manage risk.

Of course, your best move is to work with your financial professional. He or she can help you create a plan to prepare for a potential drop in bond prices.

Asset allocation/diversification does not guarantee a profit or protect against a loss.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

t130725035w