Interest Rates and Bond Prices
Key Points – Interest Rates and Bond Prices
- The Relationship Between Interest Rates and Bond Prices Is Like a Teeter-Totter
- When Interest Rates Go Up, Bond Prices Go Down
- Looking for Appealing Alternatives in the Bond Market
- Working with a Financial Professional to Truly Understand Options in the Bond Market
- 22 minutes to read | 38 minutes to listen
Do you remember in your childhood when you and a good friend would play on a teeter-totter? Well, we’re seeing another example of how a teeter-totter works again right before our eyes with what’s going on with interest rates and bond prices. As interest rates go up on one end of the teeter-totter, bond prices are falling on the other end. Dean Barber and Bud Kasper take a deep dive into the relationship between interest rates and bond prices and provide some education on bond alternatives.
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The Relationship Between Interest Rates and Bond Prices Is Like a Teeter-Totter
Dean Barber: Thanks so much to those who join us on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. I want to talk about back in the day when you were a little kid. Think about when you were on the playground and your favorite thing to do was sitting on the teeter-totter. Do you remember doing that, Bud?
Bud Kasper: Sure, I do.
Dean Barber: I’m just making that up.
Bud Kasper: I know, but I was imagining who was on the other side of the teeter-totter.
Dean Barber: Some big old guy.
Bud Kasper: What was her name?
Dean Barber: Oh! Well, I bring up the teeter-totter because at some point in our youth, all of us played on it.
Bud Kasper: Sure. Of course.
When Interest Rates Go Up, Bond Prices Go Down
Dean Barber: And the reason I want to talk about the teeter-totter is because when things that are happening in the economy and in the market and interest rate environment like they are today, it is a lot like a teeter-totter. You have bond values on one end of the teeter-totter, and you’ve got interest rates on the other end.
We’ve seen this slow progression over the last 30 to 40 years of declining interest rates, interest rates going down. Interest rates had been slowly going down and suddenly they were on the ground and bond values were way up in the air.
Well, so far this year, we’ve seen those interest rates rise. That is causing a precipitous fall in bond prices. I think it bears for us to give some education on what’s happening in the bond market. I want to let everybody know before we get in too deep into this topic that Bud and I are going to be discussing some very specific investments in the bond arena and in the fixed income arena. And by no means is what Bud and I talking about going to be investment advice for you. This is simply education.
So, don’t take what we’re saying today and go, “I’m going to go buy this” or “I’m going to go sell this.” Don’t do that. First, talk to somebody who is a professional in the industry. Make sure you understand everything about what you’re buying or selling.
Fed Funds Rate Sees Half-Point Hike
Bud Kasper: Yeah. When interest rates were coming down, what does that do? That makes stocks very attractive. That’s the experience that we had until January. The Federal Reserve finally said, “Oops, we might be a little bit late to this. We need to start raising rates.” We’ve seen the results of that with the initial 0.25% move. Now, we have this week’s move of 0.5% as well. Therefore, the issue at hand is where are bonds going to go from here? They’ve already been slapped very hard so far.
Dean Barber: Let’s talk about how hard they’ve been slapped. We’re going to focus on the 10-year treasury because its yield is considered by many people to be the risk-free return. The 10-year treasury was yielding right at about 1.6% on January 1. It’s now hovering right around 3%. So, we have a 1.4% rise in the 10-year treasury. That’s far more than what the Fed has done.
There’s an ETF called iShares that is a seven-to 10-year treasury. It has fallen by 11.99% this year with a 1.4% increase in the yield. That’s a big deal.
Bud Kasper: That’s a huge deal. And to think that from a strategic perspective, many times we would use that investment as an offset to what the stock market was doing. But now, this is so negative anymore that it’s very dangerous.
Dean Barber: Right. I’m going to go over a few other things. AGG is another ETF that mirrors the bond aggregate. AGG is negative by 9.72% this year. And the S&P 500 is negative by about 12% this year. What that means is that everything is falling in value together.
Where Will the Fed Funds Rate Be by Year’s End?
I want to help people understand what is happening. If the Fed gets its way, and most likely it will, and we wind up with a Fed funds rate that is between 2.5% and 3% by the end of the year. What do you think the odds are that the 10-year treasury stays around 3%?
Bud Kasper: That won’t happen.
Dean Barber: What do you think the odds are that the 10-year treasury gets up above 4%?
Bud Kasper: That’s likely.
Dean Barber: OK. My point is this. A 1% rise in the 10-year treasury can cause as much as a 10% decline in the value of the 10-year treasury. We’ve already seen it play out this year. It has people saying, “If I own bonds or think about buying bonds, it’s like catching a falling knife. What should I be doing?”
The Bond Market Is Much Bigger Than the Stock Market
But the good news is that the bond market is a far larger market than the stock market. There are places in the bond market where you can make money today. That’s really what we want to talk about. We’re not trying to give investment advice, but the easy ride in traditional bonds to make money is over. Interest rates are rising and bond prices are going to be falling for the foreseeable future.
Bud Kasper: Right. That takes all that safe money that you thought you had and makes it vulnerable.
Alternatives in the Bond Market
Dean Barber: Right. We’re going to talk about alternatives to the traditional bond market, things that you can do today, and conversations that you can start with your financial advisor, if you have one.
This is much easier to see than predicting what the stock market is going to do over the next six to nine months. The interest rates are moving. We can see it. Time to be prepared.
Normally, Bud and I are talking about strategy around Social Security planning, tax planning, Medicare, and creating a great financial plan. But with everything that’s happening with interest rates this year and the forecast of bonds, we believe that is all worth discussing as well. I believe we are on the cusp of what could be a bear market in bonds. Some bonds are already in bear market territory.
I thought it would be good for Bud and I to discuss some very specific alternatives that people have when it comes to bonds. As we have this discussion, I just want to remind everyone that we’re not giving investment advice. This is simply Bud and I talking about what alternatives are out there.
This is not intended for you to take what we’re saying today and go out and make investment decisions. It’s intended for you to become a more intelligent and informed investor, whether you’re doing this on your own or working with a professional advisor. Just talk to somebody and make sure you understand all the risks and potential rewards that are out there on any of these things.
Types of Bonds
Bud Kasper: One of the things that we need to discuss as well is the way that you can buy bonds. You can buy them as a mutual fund, ETF, or go with direct bonds. There are pros and cons to each of those. Investors need to understand that before they make decisions.
Dean Barber: They certainly do. All right, so let’s talk about the bear market in bonds that I alluded to earlier. The definition of a bear market is what, Bud?
Bud Kasper: A drop of 20% or more.
Dean Barber: Yep, yep. So, the iShares 20-year treasury bond ETF, which is ticker symbol TLT, is -19.92% year to date.
Bud Kasper: Wait. I thought treasuries were safe and secure?
Dean Barber: But you need to hold it to maturity.
Bud Kasper: That’s right.
Rising Interest Rates Are a Symptom of Inflationary Pressures
Dean Barber: If you bought a 20-year treasury at the beginning of the year with the yields less than 2%, that meant you were willing to accept that less than 2% yield for a full 20-year period.
Bud Kasper: And guess what wiped that away?
Dean Barber: Rising interest rates.
Bud Kasper: Inflation.
Dean Barber: Inflation. Interest rates going up is a symptom of the inflationary pressures that we’re seeing.
Bud Kasper: Absolutely. The question that any investor would ask themselves is, “Where is inflation going from here?”
Powell’s (Late?) Push to Combat Inflation
Dean Barber: Well, if Jerome Powell has anything to do with it, he’ll stop it. That is what he’s saying. He wants to get inflation nailed down. I don’t think it’s going to be that easy. Anytime the Fed starts talking about raising rates as aggressively as they are, they threaten the economy to put it into a recession.
Bud Kasper: People get very anxious when they see these type of moves, especially coming from the Federal Reserve. In July of last year, Dean and I were saying that the Federal Reserve better start thinking about raising rates because they’re going to get behind the eight-ball. And what do we see? We didn’t see an increase until March.
But regardless, they’re behind. If they had started this earlier, we could have probably engineered a soft landing. And we might be still able to do that. A soft landing is going to be more difficult now, though.
Dean Barber: It is going to be more difficult. Now, of course, you’re going to hear Jerome Powell and other members of the FOMC saying, “We’re going to engineer a soft landing.” But there are other people out there that are saying this is going to be a hard landing and it’s going to turn into a recession. Nobody really knows. There is no crystal ball.
Eye-Popping Numbers on the Decline of Traditional Bonds
But the point we want to make is that if you own 10-year treasuries, you’re off by 12% this year. If you own 20-year treasuries, you’re off by 20% this year. If you own the S&P 500, you’re off by 12% this year. You’re off by 20% this year if you own the NASDAQ. What in the world? And if you own the bond AGG, you’re down 10% this year.
Bud Kasper: Yeah. It’s unbelievable from that perspective. But again, if you know the simple math associated with bonds, that’s to be expected. In this situation where we have rising interest rates, bond prices are going to go down. But if you own a direct bond, then you have a maturity date. You can go in and buy for a specific price for a specific yield. So, if interest rates go up, it really doesn’t matter as long as you hold it to maturity.
Examples of Individual Bonds
Dean Barber: OK. Let’s talk about individual bonds that you can own. Some of the ones that I think are attractive right now aren’t traditional bonds like loans, general obligation bonds, or government bonds. These are called notes. They’re issued typically by banks. I’ll use a fixed to float note that would be callable in August 2024 as an example.
Bud Kasper: Callable means that the entity—in this case, the bank—could the money back.
Dean Barber: They could call it back and give you back your principal investment. Now, in this case, you need to pay a little over the $100 par value of the note.
Today, you’d have to pay $100.75. So, you’re paying 75 cents more for that bond than it’s going to mature for. The yield is 5%. The return to August 24 is annualized at 4.644%. In this instance, we can get 4.644% for the next 28 months. At the end of 28 months, the bank can either call it back and give you back $100 for the bond that you paid $100.75 for. Or they will need to pay you whatever the five-year treasury is, which is currently 3% plus 3.17% on top of that. Therefore, if you continue to hold that note and they don’t call it back, you’re now going to be getting 6.17% yield on that note.
Bud Kasper: Yeah, that sounds attractive.
Notes Sit on the Middle of the Teeter-Totter
Dean Barber: Something like that is super attractive. You got a 28-month period. This is liquid. You could sell it. You don’t have to hold it for the entire timeframe.
Bud Kasper: Right. But remember, if interest rates go up, then your secondary value is going to go down.
Dean Barber: It could. But here’s the thing. Go back to that teeter-totter example. This would be like sitting in the middle of a teeter-totter.
Bud Kasper: Good point. Yeah.
Because There’s No Action on the Middle of the Teeter-Totter
Dean Barber: And we did that maybe once or twice, but it wasn’t very much fun because there was no action in the middle.
Bud Kasper: That’s right.
Dean Barber: That’s what this is like. You have a maturity or a call date that’s only 28 months out. The rise in interest rates on the far end of that teeter-totter aren’t really going to affect that center part of the teeter-totter very much.
Bud Kasper: The takeaway is that there are solutions for you in relatively secure investments that can get you a very sweet return. However, you need to know who you’re working with and how to go about finding those. Do they fit into your portfolio?
Dean Barber: Right. As we discuss this rising interest rate environment and how it’s wreaked havoc on bond prices, I want to stress again that we’re not trying to give investment advice. We’re simply saying that there are alternatives that you need to be discussing with your financial professional. And if you’re a do-it-yourselfer, you have a lot of homework to do because this is not the traditional thing that we normally think of.
So, Bud, if I said to you inflation protected treasuries, does that make sense to you today?
Bud Kasper: Yes, if in fact we could do it from that perspective.
Dean Barber: There is an ETF called STIP. It’s a zero-to five-year inflation-protected treasury. Earlier, I was talking about how much all these other things were down by 10%, 12%, 20% this year. The STIP is down by less than 1% and has a current yield of 5.36%.
Bud Kasper: And let me add to that. Because of what the Federal Reserve has already done with that initial quarter-point move and now half-point move, every time it continues to move forward, we get a higher amount of interest income.
Dean Barber: Right. There’s an alternative to help fight off inflation in an inflation-protected treasury in a short maturity range. That’s where we want to be today is in that short maturity range. That’s just another example. Now, you are going to have price movement in that zero-to five-year inflation-protected treasury.
In fact, the draw-down, which is a peak-to-trough drop, that occurred over the last three years that was the biggest was during COVID. The Net Asset Value (NAV) of that ETF fell by about 5% during COVID. Everything was recovered after that, but the point is that there are places to go. You need to understand what you need to do because fixed income needs to be a part of your portfolio. You can’t just put everything into the stock market, especially not if what the Fed does turns this into a recession.
Avoiding the Annuity Salespeople
Earlier this week, Bud made a comment that the annuity salespeople are salivating right now because of what is happening in the stock and bond market. Tell me what you mean by that, Bud.
Bud Kasper: All you need to do is listen to the advertisements. When people become fearful, they’ll reach out for a solution or safety net of some sort. This is where the annuity people come in and start talking about never having another losing year the rest of your life. They talk about always having a certain amount of guaranteed income and upside participation in the market of the stock.
In other words, Nirvana. They say it’s the best thing you could ever put your money into. But that’s not necessarily true. There are a lot of issues that surround that type of the solution.
One of the things that we bring up that needs to be universally understood is that there are some great fixed income options that don’t have surrender charges associated with it. And why would there be a surrender charge on a product? Because there is a commission paid and they need to recover that. The only way they can recover it is to keep that money in the policy. That’s why if you get out of the policy prematurely, you’re going to have a surrender charge.
Dean Barber: Bud, I just had a meeting last week with some people that had put some money into a five-year fixed annuity. You’re going to love this story. They put it in starting in July 2020 with a 3.1% guarantee. What do you think is wrong with this picture? In July 2020, there was no interest rates anywhere near that.
What Is a Market Value Adjustment?
This insurance company shall remain nameless, but they attached a market value adjustment (MVA) to that annuity. The way that the market value adjustment works on a fixed annuity is just like a bond. If interest rates start to go up, you have a negative market value adjustment.
So, this individual had put in $50,000 into this guaranteed annuity that was going to pay 3.17%. They had a negative market value adjustment already to where if they were to pull the money out, $44,000 is all they’re going to get.
Bud Kasper: So, how do they say guaranteed?
Dean Barber: Well, it has the MVA and it tells you about the MVA in the policy itself. So, I mean, you should know better.
Bud Kasper: But that’s grabbing the money before the maturity date.
Dean Barber: Yeah. But even if interest rates have risen significantly over that five-year period, you could still wind up getting less than what you put in.
Bud Kasper: Wow. Well, there’s a concern.
When An Annuity Can Look Like a Bond
Dean Barber: People don’t even know that some annuities have that market value adjustment. It causes that annuity to look just like a bond.
Bud Kasper: Well, that is kind of a scary thing, especially for people who are anticipating one thing and getting another.
Dean Barber: Well now, let me ask you a question. When would it be a good idea to buy an annuity with an MVA?
Bud Kasper: When interest rates are high and going lower.
Dean Barber: Correct. Because then you get a positive market value adjustment. What do you think the insurance companies did with the money so they can say, “We’re going to get 3.17% and we already paid the agent a commission.”
They know where they locked that money up. If interest rates go up, they’re going to lose money. And guess who else is going to lose money? The person who put the money in.
Bud Kasper: Yeah. That’s incredible, isn’t it?
Dean Barber: Yeah. I asked the person I was talking to if that had been explained to them. They were like, “No, they didn’t. They just very simply said it was going to be guaranteed at 3.17%.” I said, “Well, let’s read your policy.” And it’s right there.
Yet Another Example of the Importance of Financial Education
Bud Kasper: Amazing. Well, these are little things that make America’s Wealth Management Show interesting.
Dean Barber: But here’s the thing. We talked earlier about STIP, which is the zero-to five-year treasury inflation-protected securities ETF. It has a three-year average annual return of 4.24% and current yield of 5.36%. Bud and I know that over the last three years, we haven’t had yields nearly attractive enough to give any kind of fixed income instrument the ability to have a total return of almost 13% or 4.24% per year. How is this possible?
Well, because it’s inflation-protected. When inflation goes up, the yield on this security goes up. If it could return in three years past 4.34%, what do you think the probability is that it can return more than that over the next three years? Pretty good.
Bud Kasper: Now for disclosure, I’ve used this investment with clients for a long time. But it’s especially attractive now, of course, because interest rates have been rising.
Dean Barber: And because inflation is there.
Shorter Maturity Means Lower Volatility
Bud Kasper: But let me add to this to provide some clarity. There are different maturity ranges that are associated with any type of a bond investment. Because this is zero to five years, what does that tell an investor? It means that the volatility is going to be lower. At the five-year period, there is a rollover of what happens with the bonds at that time.
Here’s the key. If we were to look at the interest income paid on that bond just three weeks ago, it was 4.8%. Today, it’s 5.3%. Why did it go up? It went up because the Federal Reserve raised the Fed funds rate 0.5% and will likely continue to raise rates.
Dean Barber: The yield on that is going to continue to go up.
Bud Kasper: Exactly.
Dean Barber: So, why would you fall prey to some annuity salesperson that’s going to try to get you to lock in your money? And by the way, this thing is liquid every day.
Bud Kasper: Yes, right.
Dean Barber: And again, I want to remind everybody, we’re talking about some very specific strategies around fixed income investing. But Bud and I are not trying to give you investment advice. We’re trying to educate you that there are things that you can be doing that are different than the typical bond aggregate.
Earlier, Bud mentioned the STIP, the zero-to five-year treasury that has a short maturity. It’s kind of like sitting in the middle of the teeter-totter.
A Look at the Longer-Term Inflation-Protected Treasury
There’s also an ETF that does the longer-term inflation-protected treasury. It has a current yield of 5.99% versus the 5.36%, but sits further out on that teeter-totter at seven to 10 years. It has a -6.21% return this year. And the three-year total return is just about a 0.5% per year more than the zero to five years. To me, that’s not worth the risk.
So, we go to the shorter term. Now, there will be a day when we want to go further back out on that teeter-totter, but that’s when interest rates have already risen and we think that they have the possibility of coming back down.
Bud Kasper: Here’s what I want you to think about from an investment perspective. Let’s say you have the zero to five-year treasury inflation-protected security ETF and the Fed is going to raise rates more into the future.
That means we’re going to participate in more income every time they do that. So, if they did raise the Fed funds rate to 2.5% to 2.75% by year’s end, we could be looking at 6.5%. At some point, they’ll stop raising rates. And when that happens, we can collect that amount of increased income, depending on what the bond market is doing at that time. But the cash flow is going to be significant.
Where Will 30-Year Mortgage Rates Be by Year’s End?
Dean Barber: Remember what we talked about last week, Bud. There are a lot of the experts out there in the mortgage environment that are anticipating that the 30-year mortgage could be up as high as 6.75% by the end of this year. All these rates are rising. It’s going to change the dynamics of how you invest, how you buy, and what you do. What has worked over the last 10 to 20 years is not going to work over the next 10 to 20 years.
So, you need to get informed and educated. You need to make sure that you know what questions to ask so that you don’t get hung out to dry. Remember, the 20-year treasuries are already in bear market territory this year. And it’s very possible with the Fed doing what they’re doing that the 10-year treasury could easily wind up in bear market territory. We haven’t seen anything like that since the early 1980s.
Summing Up the Relationship Between Interest Rates and Bond Prices
To do a quick review, we’ve been talking a lot about what’s going on with interest rates and how that’s impacting bond prices. We’re looking at bonds with shorter and longer maturities. Depending upon where you are in the bond market, you could be flat this year or maybe a touch up, but most bonds are down just a little bit. Or you could be way down if you own the wrong stuff.
The bond aggregate is down 10%. The 10-year treasury and 20-year treasury are down 12% and 20%, respectively. So, bonds could be a drag on your portfolio.
Financial Flexibility Is Critical Moving Forward
We’ve also talked about the short-term inflation-protected treasuries and the fixed to float notes. We talked about the seven-to 10-year inflation-protected treasuries, where you can pick up some yield and where you can get some predictable returns at very low risk. Those are also liquid, so you don’t have to tie your money up. Don’t fall prey to the annuity salespeople out there that lock your money up for five years or 10 years or whatever. With where we are right now, the flexibility and the ability to move in the future is going to be critical.
Bud Kasper: Oh, I so agree with that. There will be an opportunity to go back into the traditional type of bonds. And when that happens, we’re probably going to be at some incredibly attractive yields, meaning the amount of interest income that would be paid for that either through a fund format, ETF, or direct bonds themselves.
I’m in the zero to five right now and I’m sitting here thinking that maybe by the time we get to the third increase from the Federal Reserve, I need to start dollar-cost averaging back into these. Because then I can pick up the yield with less of a downside since the Federal Reserve hopefully will have to stop raising rates at some point in the future.
Yield Curve Inversions
Dean Barber: But you’re not going to know the answer to that riddle, Bud, until we get further into the year and we continue to look at economic activity. If the economy slows too fast and dips into a recession, then what you’re saying is accurate.
We did have the inversion of the rate from the two-year to the 10-year. It’s not inverted anymore, but the three-year to the 10-year is inverted. The five-year to the 10-year and the seven-year to the 10-year are inverted. So, the three, five, and seven-year treasuries are all yielding higher than the 10-year and the 30-year.
Bud Kasper: We use that twos and 10s analogy for the prediction of a recession, and it’s probably going to be true. But when does it really hit? It hasn’t hit yet, but it very likely could do that before the end of the year. And will it be a deep recession if it does happen? It depends.
Domestic Economic Situation and Geopolitical Issues Create Uncertainty
Dean Barber: We don’t know. It’s impossible to tell. This is a cautionary time. There are so many variables up in the air from a domestic economic point of view. And then you start bringing in all the geopolitical issues that complicate things further.
Bud Kasper: Sure. People are looking for answers or hoping that their advisor will find the answers for them. Traditionally in these difficult times, the first word you hear is gold. Gold has done OK, but it hasn’t been a great investment this year by any stretch of the imagination.
If we look at specific sectors, healthcare usually does better in these type of environments. Energy is doing terrific. Is this the time to be getting into it? That’s always the difficult question, isn’t it?
Dean Barber: Well, and also consumer staples.
Bud Kasper: Consumer staples, absolutely.
Dean Barber: Just to be up to date on your gold, Bud, it’s up 1.8% year to date. So, like you said, it’s done OK.
Bud Kasper: Yeah, in relationship to the market.
Dean Barber: Yeah. It has done OK compared to the bond aggregate, the 10-year treasury, the S&P 500, and the NASDAQ. And again, we’re talking about specific investments today and not meaning to give you investment advice. That’s not what we’re here to do. We’re trying to educate you to help you understand that in this crazy environment, there are places to look.
The Rhyme and Reason Behind Put Spreads
Now, I want to talk about a specific fund. I’m not going to give the ticker on this fund because I think it’s a little too complicated to really have people truly understand it. This fund involves writing put spreads. When you write put spreads, your goal is to collect a premium for the put.
Bud Kasper: And you get paid.
Dean Barber: And then have the put expire worthless.
Bud Kasper: I know, but people need to know what put really means.
Dean Barber: A put means that you’re betting that the market is not going to fall more than X percent over a certain period. Now with this particular fund, they buy these put spreads that are only five days out. Most of the time, they’re betting over that five-day period that the markets won’t fall more than, say, 7% or 10%. They have a 99.5% probability of expiring worthless.
Collecting the Premium on the Put Spread
The goal of this particular fund is to collect the premium on the put spread. That is your return. The goal is to not have a negative month. In the last 26 months, it’s had one negative month. That was January when it was down a little over 1%. It’s positive on the year at about 1%. And again, and it’s totally liquid. This is not something that you’re going to pay a commission to buy or to sell or anything like that. It’s totally liquid. The point is that there are safe havens for your money.
Now, one other one. I had a client come to me last week. He said, “Dean, I have this money and I want to spend it in about 13 to 14 months. I’ve got something very specific to spend it on, but I hate putting it in the bank at 0.03% or something like that.” And I said, “Fine. Let’s take the money and we’ll go buy a one-year treasury.”
It was a $250,000 and we got a 2.03% return on a one-year treasury. This is like a one-year CD that we’re going to get 2.03% over that period. If he wants to sell it in between time, he can. But if interest rates go up on that one-year treasury, he won’t get back what he paid for it. If he holds it for the full 12 months, though, he’s going to make 2.03%. Those types of things are coming back into favor.
Why It’s So Important to Work with a Financial Professional
Bud Kasper: Right. There are a good number of options but let me put this caveat out there. There are a lot of strategies that have more detail than is normally understood. Therefore, you should be working with somebody who truly understands the markets and the options that are out there. This is what your money is at stake with. You need to have somebody that really has a background in circumventing some of the seriousness of declines and how to counteract those in these times that we’re in.
Dean Barber: And speaking of treasuries, you could go out today and buy a two-year treasury at 2.8%.
Bud Kasper: There you go.
Dean Barber: Once again, there are things that you can do that you can do to make money. You can be safe, but you have to get out of the mindset of just going out and buying an ETF that mirrors the bond aggregate.
Bud Kasper: You’d lose money with that one this year, for sure, and probably beyond this year as well.
Interest Rates Will Likely Keep on Rising, So Traditional Bond Prices Should Keep on Falling
Dean Barber: Yeah, at least for the foreseeable future because we know the Fed is going to continue to raise rates this year. There is the real possibility that the bond aggregate sees its first bear market in 40 years.
Bud Kasper: Can you imagine?
Dean Barber: No. I never thought we’d see this happen in this way.
Bud Kasper: And it was unavoidable. If the Federal Reserve had only moved earlier, this would be a lot more muted than what it is.
Dean Barber: I don’t want to get too political, but monetary policy is the reason for a lot of this. That is all the stimulus that was pushed into the economy after COVID.
Bud Kasper: $5 trillion. It’s overboard.
This Isn’t a Time to Be Guessing While Financial Planning
Dean Barber: That has done a lot to cause this inflation. At any rate, don’t just sit on your hands. This is not a time to guess. It’s a time to get educated. It’s a time to talk to somebody. We’d love to have you talk to us. You can do exactly that by scheduling a 20-minute ask anything session or a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ professionals here.
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