Bondholders may have seen their portfolios come through the recent market turmoil in fairly good shape; however, they may not want to assume that performance will continue, due to the prospects for inflation and interest rate increases.
The U.S. government reacted to the financial crisis of 2008 and 2009 by pumping an unprecedented amount of money into the economy – two packages of fiscal stimulus totaling more than $1 trillion, according to Stimulus.org. That stimulus could cause inflation to rise.
The government has also kept interest rates near all-time lows in order to stimulate consumer spending. But many economists think rates are poised to increase, and that, along with a rise in inflation, will dampen bond prices.
While the threat isn’t immediate, it’s not too early to consider how you might try to protect your bond portfolio from these threats. There are a number of ways to do so. For example, you might consider moving your bond investments to mutual funds that invest in floating-rate loans or foreign bonds, both of which have become more affordable as Europe’s debt crisis has sparked a shift back to sectors viewed as so-called safe havens. Intermediate-term bond funds may also be an option for a rising-interest-rate environment because shorter-term bond prices tend to fall less sharply than longer-term bond prices when interest rates rise.
Your financial advisor can help you determine if any of these investments are appropriate for you.