(Newswire.net – 28 August 2013) New York, NY – Kenneth (Ken) Brackett of Lighthouse Financial has just released the following information regarding the bond market. Ken says that we are now facing a rising interest rate environment for the first time in 14 years. Ken was predicting this back in January and urging people to protect themselves. Many people may think that higher interest rates are a good thing. Unfortunately, there is an inverse relationship that exists between interest rates and bond values. As interest rates go up, bond values will go down. A simple explanation for why would be: let’s say that you own an Alcoa corporate bond that has a declared interest rate of 4%. If interest rates go up and people can now buy an Alcoa corporate that is paying 5%, who will want our 4% bond? You got it – no one will, so we will have to discount it to get rid of it. Actually, it will automatically be discounted because it will show on your statements as having lost value.
The last 13 years have been a very good time for bonds as interest rates have been dropping. Ken Brackett states, “We all know that the Federal Reserve is planning to raise rates sometime in 2015. This will be tied to the unemployment numbers. They want to see the economy improve before they make this change. If we know that the Fed is not raising rates, then why is the 10 year treasury moving so much?” He continues to say, “FYI, it has gone from 1.6% in December to 2.6% as of July, 2013. There are two reasons for this. First off, we have so many people not happy with 1 or 2% return on their money who are now jumping into the stock market to get better returns. As enough people sell bonds, their value goes down and the yields go up. Secondly, we have a reaction to what the market is doing in anticipation of what the Fed will be doing.”
What Ken recommends is shortening the maturities on all bond positions to less than 3 years. This will help to mitigate the losses due to rising interest rates.
More information from LightHouse Financial and Kenneth Brackett can be found on their website here http://www.mylighthousefinancial.com/.