Investing in a rising interest rate environment:
What you need to know.

One of our biggest worries is that individuals (or their advisors) don’t understand the impact that rising rates will have on bonds. Our goal is to help you understand the potential ramifications to those individual bonds or bond funds that you own.

To begin, a basic understanding of the relationship between interest rates and bonds is essential. To keep it simple interest rates and bonds have an inverse relationship.

  • When interest rates are higher and begin to fall (think 2008) bond prices expand. This is good for bond owners.
  • When interest rates are low and begin to rise (2016?), bond prices fall. This is bad for bond owners.

With that basic back drop, here are some key points that you must know about the coming rising rate environment.

Key Point: Almost All bonds will drop in value as rates rise, but some worse than others.

The chart below depicts the impact that a 1 percent rise in interest rates will have on bonds. While a 1 percent hike in rates will not happen overnight, it’s still important to understand that it could certainly happen over six months or a year.

Key Point: The bond decline could last approximately 25 months.

Research from Morningstar1 indicates that when interest rates (Fed Funds rate) are below 3 percent and begin rising, the average length of time the decline lasts is on average 25 months. So what does this mean to you?

The Retiree. If you are relying on these bonds to help you with your retirement then you may want to consider another investment.

The Pre-Retiree. If you are close to retirement and a decline in bond prices will hurt your ability to retire, then you may want to consider another investment.

CLICK TO ENLARGE

The Pre-Retiree. If you are close to retirement and a decline in bond prices will hurt your ability to retire, then you may want to consider another investment.

The Accumulator. If you are 20-30 years from retirement . . . why the heck are you investing in bonds anyway!? Hopefully you or your advisor understands the importance of building wealth.

Buy and Hold Investor. This individual will not care if bond prices fall for two plus years. They just close their eyes and hold on.

As we have seen and research has proven, bonds suffer when interest rates rise. So what about stocks?

Key Point: Stocks perform relatively well after interest rates begin to rise.

One common misunderstanding is that rising rates is a bad thing. This is not true. Among other things, rising rates indicate that the economy is improving. As the economy improves stocks perform well.

Here’s two key statistics.

The average return of global stocks2 following the start of a rising rate environment is . . .

  1. For the following 12 months = 7 percent
  2. For the following 24 months = 19 percent

Key Point: Great opportunities will exist in the future.

While we at Iron Gate Global don’t like the bond market right now, we will in the coming years. As interest rates rise over the coming years we will be researching those potential bond products that offer a great yield for 50 or 60 cents on the dollar. Those investing in bonds in 2008 know exactly what we are talking about, specifically in the high yield space. We will be on the lookout for those investments that can provide not only great yields but great returns as well.

Brian Hunsaker
Brett Pattison

P: (801) 808-6106
F: (801) 575-3500

brian@igga.dev
brett@igga.dev

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1. Long-term government bonds are represented by the Ibbotson SBBI U.S. Long-Term Government Bond Total Return Index. The analysis of downturns is based on past downturns (1926–2013) of 5% or more. The long-term government-bond yield used in the analysis is represented by the Ibbotson SBBI U.S. Long-Term Government Bond Yield Index.

2. MSCI All World Country Index used for the periods from 1971 to 2004.

Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Iron Gate Global LLC. of any particular security, transaction or investment.

Information presented is gathered from sources to be reliable. However, Iron Gate Global Advisors LLC does not attest to its accuracy and is not responsible for errors and /or omissions. Past performance does not guarantee future results.