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Bonds and Inflation

Fixed income investors might welcome a rise in yields on their investments, but increased interest rates won’t necessarily ensure more money. After years of paltry returns, interest-sensitive investments are seeing the beginning of a bump in rates. Increasing rates, however, can affect your bond investments in ways you might not have anticipated.

Bond Ups and Downs

When interest rates rise, the yields on new bond issues typically rise with them. Newer issues pay higher interest rates, meaning you typically have to accept a lower yield than first promised for older bonds sold before maturity because their rates aren’t as attractive. If, however, you buy a bond and hold it to maturity, you will receive the yield promised when you bought the investment, regardless of current interest rates.

Bond Funds Differ

Bond mutual funds offer no such promises because fund managers trade regularly and often sell holdings before maturity. Thus, if you own bond fund shares, you could earn more or less than the going rate for bonds.

February 2018 Newsletter Previous Article