HISTORICALLY LOW INTEREST RATES FOR THE past few years have been very helpful to those refinancing their mortgages and extending loans, such as car, boat and general credit card rates. The yin to the yang has been the negative effect to those on fixed income, and those folks depending on interest income from fixed income securities, such as savings accounts, CD and bonds. The prolonged depression of interest rates near zero has led to reduced cash flow for these people usually past their working years, and has led to the need to subsidize income from
the place of necessity. It is said that the recent spike in the Dow Jones Industrial Average to approximately 15,550 is in part due to an act of desperation from those seeking some way to bring in more income, and stepping far beyond their risk tolerance in the hope of bringing in additional income–hoping the investments selected will generate a higher income or return. Our economic trend of late has had many questioning their "sleep at night quotient" in lieu of subsidizing their income. Either way you look at it, it's not a pretty site or situation.
Many have positioned their investments in bond related investments; either government backed such as treasuries, corporates or municipals which traditionally pay a fixed dividend to the bondholder, thus creating a monthly, quarterly or semi-annual payment depending on the bond. This article is not to discuss or comment on the safety or security of bonds, but the relationship of bonds to interest rates and yields.
If you were to picture a child's see-saw, you have a weight on each side. Imagine the two weights are bond prices on one side, and on the other side sits interest rates and bond yields. Just like the see-saw, if yields move up, the value of the bonds at that second in time will move down. For the past few quarters, in order to stimulate the economy, our Fed Chairman Ben Bernanke has had a program in effect which the Government buys $85 billion of Treasury securities monthly. Not to get into the whys and economic benefits of the program, it has helped to level out the economy and keep interest rates low. Not too long ago in June, there was a Fed meeting and it was insinuated (not said outright) that at some time, the bond buying program may start to be tapered off. Well, the results of a sheer insinuation drove interest rates up more than a full point and guess where bond prices went (refer to the see-saw lesson above)? Bond prices (the value of the bond in the open market should you choose to sell at that given time) plummeted. When investors checked the value of their portfolio, they saw a very fast drop in market value as a result. The moral to the story? Welcome to the market: it is unpredictable and volatile, even if you think you are invested conservatively.There are many factors that affect the value of securities, and nothing short of a sneeze by a public figure anywhere in the world can turn the market’s direction in an instant. If you have any concerns about your portfolio, call your Chestnut Planner at anytime to schedule a review or answer any questions- we're here for you. When is conservative not so conservative? At anytime the market chooses.
