Ken Brackett of Lighthouse Financial, Wilmington Delaware, Offers Advice on Bond Market Correction

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( — 4, April, 2013) Wilmington, DE — Ken Brackett of Lighthouse Financial today released information regarding the recent bond market correction. Mr. Brackett, explained the inverse relationship that exists between interest rates and bond values, “as interest rates rise there is a corresponding drop in value of bonds. As a hypothetical example let’s say that you own a Ford corporate bond with a maturity date of 09/01/2019 that has a fixed interest rate of 4%. Now let’s assume that interest rates go up this year and in November of this year, Ford will be offering the same length bond with a fixed interest rate of 5%. No one will want your 4% bond when they can get 5%, so your 4% bond decreases in value.”

This is known as Interest Rate Risk. More than likely, if an individual wants to sell bonds offered a lower interest rate, they will have to sell them at a discount. Ken goes on to say, “The formula that we can use to determine what an investor’s loss will be for every 1% rise in interest rates. We simply take the maturity and multiply it by the % rise in interest rates. In the example above, we will have a 6% loss as interest rates rose 1% and there is 6 years left until maturity.”

One of the traditional ways used to diversify away the “interest rate risk”, is to ladder the bond portfolio. If there is a mix of various maturities, there will be bonds maturing each year. Those proceeds can be used to buy new bonds with the then available interest rates.

Ken Brackett says, “The last 12 years have been exceptionally good for the bond market as we have been in a falling interest rate environment. This is partly due to the Federal Reserve dropping interest rates to almost 0% ever since the market crash in 2000. This was done intentionally to create a boom on real assets such as commodities and real estate. It was successful and we saw real estate climb in value.” He goes on to explain, “The next 12 years will certainly not be like the last 12 years. More than likely, we will be in a rising interest rate environment, which will be harmful to our bond returns. If we were averaging 6% a year in bonds, it may be likely to only average 4% a year in those same bonds.”

The Federal Reserve has announced that interest rates will rise in 2015. Reading between the lines, this is their way of telling us that they expect run-away inflation that can only be curtailed by raising interest rates. Mr. Brackett explains, “What we have seen in the last 3 months is not related to the Federal Reserve raising rates, but rather the move on the 10 year Treasury. This was trading at 1.6% 3 months ago, and it is currently trading over 1.9%. This might seem like a very small move, but it is a change of 16% from where it was.” More than likely, this move upward will continue.

Mr. Brackett advises that, “Part of this move is due to the fact that many people are dumping their treasuries which only pay 1.6% and going after the huge growth that we are seeing in the stock market. No matter how great our bond positions are, if everyone is selling them, the value will go down.”

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About Ken Brackett

Ken Brackett, owner and founder of Lighthouse Financial Advisory Group located in Wilmington, Delaware. The firm is a Two-Time Winner of the a Five-Star Wealth Manager Award by both Delaware Today Magazine and the Philadelphia Magazine. Lighthouse Financial is registered with the state of Delaware, Better Business Bureau, the National Ethics Bureau and the National Association of Securities Dealers.

Ken is a prominent financial educator in the New Castle County area as well as a Registered Investment Advisor. His retirement classes are consistently oversold and he has done planning for the retirees of General Electric, the University of Pennsylvania, Rohm & Haas and DuPont. With an emphasis in accounting and finance, he graduated with a Bachelor’s degree in 1988 and has worked with the senior age group since 1991.