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What Will Happen When Interest Rates Rise

Interest rates have been very low for quite a while now. Eventually, that is going to change. And when it does, bond investors could take it on the chin.

The reason: bond prices and interest rates have an inverse relationship. When interest rates rise, bond prices fall (longer maturity bonds are more vulnerable, as their rates are locked in for a longer period of time).

As a way of measuring interest rates, we can look at the history of the yield on ten-year Treasuries. Since the early 60’s, the average annual ten-year yield has been 6.56%. When the recession hit, rates dropped to a record low 1.8% in 2008. But they didn’t start to climb back up just because the recession ended. That’s because the Federal Reserve has held rates down with their program to stimulate the economy.

Source: Zacks

The Federal Reserve has signaled a rate hike in the spring 2015. Whether rates rise later or sooner, the fact that a hike is on the radar means bond investors would behoove themselves to be ready.

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