As the Season Changes, So Should Your Bond Allocation

William F. Van Sant III, CFP®, Senior Vice President, Sales Manager, Univest Investments, Inc.

Many investors have heavily favored bonds over the past several years given their lower risk relative to stocks and their attractive yields compared to lower yielding bank products. Additionally, bonds thrived as our economy experienced several downturns during this time, including the Great Recession of 2008. As a result, bonds produced higher than average returns and investors were very happy.

Will this continue? Most likely not. While bonds are still a low–risk asset class and should not be abandoned, investors need to revisit their allocation given the inevitable rise in interest rates as the economy continues to improve. As you may know, bond prices move in the opposite direction of rates. Investors were made aware of the lesson rather profoundly this past May and June when the 10-year Treasury note went from 1.64% to 2.48%. This significant rise sent bond prices down 3% to 10%! This was certainly an eye opener for individuals reviewing their June investment statements.

What is an investor to do? Before selling out your bonds, sit down with a qualified financial planner to see what types of bonds you actually own, as various bonds react differently during periods of rising interest rates. For example, longer-duration bonds such as Treasury bonds and Treasury inflation protected bonds will be significantly more affected by rising rates than shorter-duration bonds, such as floating-rate bonds and corporate bonds. Additionally, keep in mind that while rates spiked in May and June, the long-term forecast for rates is for a more gradual rise. The Federal Reserve, whose actions and commentary directly affect interest rates, has an incentive to keep rates rising slowly to ensure the economy remains on a path of steady recovery.

As you can see, there is not a one-size-fits-all solution for investors to successfully navigate a rising rate environment. Instead, since every investor’s time frame and risk level is different, it’s necessary to take the time to sit down with a professional to evaluate how you are currently positioned and identify areas that may need to be reallocated. We can help! Contact a financial advisor at 215-721-2112 or investments@univest.net.

Securities and insurance products are offered through Univest Investments, Inc., member FINRA and SIPC, a licensed subsidiary of Univest Corporation of Pennsylvania. They are not FDIC insured, are not a deposit of or bank guaranteed, and are subject to risks, including possible loss of principal amount invested. Consult a tax advisor regarding what may be best for your personal situation.


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