The average investor doesn’t understand that they can lose money investing in the bond market. Much of that has to do with the fact that there has been a 30 year bull market in bonds so many investors have never experienced significant losses in fixed income. There is an inverse relationship between bond prices and interest rates. As interest rates go up, bond prices go down and visa versa. A specific example might even be more illustrative. Assume an individual buys a 20-year Treasury bond for $100,000 with a yield of 3%. Now, suppose over the next month interest rates go up and the Treasury decides to sell another 20- year bond with a yield of 4%. Any smart investor would not pay $100,000 for the bond purchased a month ago yielding 3%, when they can get one from the Treasury yielding 4%. So, what happens to the price of the bond yielding 3% – it drops in value to a point where the price yields 4%. Interest rates have been rising since the beginning of February and one can see the damage this has done to longer-term bonds in the chart below. The longer-term US Treasury ETF has lost more than 14% since the end of January.

It was just a month ago that we talked about the difficulties in the bond market (If you missed that update, you can click here to read it).   The U.S. has had a 30 year bull market in bonds that is most likely over.   So, watching how investors react when they see losses in the fixed income portfolio for the first time in many years is important. This is especially true with 401(k) investors.   We anticipate that many 401(k) investors will see a loss in their fixed income funds and sell those positions. More selling will only exacerbate the losses in the bond market.

What does this mean for portfolios?

As we stated a month ago, this is certainly not a time to invest in longer-term bonds or have a significant amount in high-yield corporate bonds. The key to investing is making your move ahead of the market move. THOR’s fixed income composition we discussed last month has helped THOR preserve our client’s capital dedicated to fixed income so far this year.

Sincerely,

Your THOR Team

THOR Investment Management, Inc. is a registered investment adviser with its principal place of business in the state of Ohio. The commentary contained in this market update is limited to the dissemination of general information pertaining to THOR’s wealth management services.

Source:  StockCharts.