Weekend Reading: Interest Rates Are Getting Weird

Posted: 04/01/2022

|Inflation |"A Wealth of Common Sense" Articles |Bonds

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.

Weekend Reading

To put it bluntly, today’s economic environment is weird, and interest rates are following suit.

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An unpredictable path: While the Fed gradually hikes interest rates in hopes of combating inflation, bond yields are responding with interesting paths in response (as displayed in the graphs here). Plain and simple, the laws of risk and reward are off. A five-year treasury shows the exact same yield as a 10-year treasury, and it’s not making much sense to investors.

We know interest rate increases paired with the market’s view of the economy are stowing this fire of confusion, and it can be even more surprising to see the inflation rate higher than the 30-year treasury rate. However, there is good news in the fixed income investment landscape as TIPS are showing higher yield and surprisingly so in the lower risk portion of bonds. This is due to the fact that yields have an inverse relationship with bond prices, and higher yields mean higher future returns.

Moral of the story: Current metrics that run the economy are moving so fast, it’s difficult to know where we go from here. As such, now is the time to re-evaluate your exposure to the bond market. You should be analyzing your interest rate risk, as well as alternatives to reduce your overall risk.

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