Are We About to Experience Massive Losses in Bonds?

In a rising interest rate environment, it may be time to look at other options

Although the show is called The Truth About Your Future, sometimes we need to go look at the past. Q1 of this year was the worst quarter for bonds in more than 40 years. Exactly as I had warned you was going to happen. The Bloomberg U.S. Aggregate Bond Index lost 6% of its value in just the first three months of the year. This was the biggest quarterly loss since 1980. Let me ask you then, how much interest did you earn in those three months? You didn't earn 6% in three months. You're probably getting 2% for the whole year, which means in the first three months of the year, you might have earned half a point in interest, but bonds fell 6%. Nice going. All this, of course, is due to rising interest rates and more rate increases are coming - a lot more, all because the Fed is trying to get inflation under control, but it's going to fail. Inflation's at a 40-year high right now, nearly 8%, and I'm predicting that it's going to go even higher.

Ric Edelman: Let me talk about interest rate risk and what this really means for you. Here's the math. For each year of maturity, a bond will lose 1% for every one point rise in interest rates. So let's say you've got a bond that matures in 10 years. Well, let's say you've got a bond fund that has a bunch of 10 year bonds in it, same thing. If you've got a 10 year maturity in your bond or bond funds, if interest rates rise half a percent, your bond or bond fund will fall 5%. If interest rates drop 1%, you lose 10. If interest rates rise 2%, you lose 20% of your money. That's for a 10 year bond, gets even worse for a 30 year bond. And that's the problem, because most income oriented retirees, they don't buy 10 year bonds because 10 year bonds don't pay the highest interest rates; they buy 30 year bonds. So when interest rates go up 2%, a 30 year bond loses 60%. When's the last time you saw the stock market fall 60% of value? This is why I've been telling you for months get out of long-term bonds. Frankly, I'm out of all bonds. Because in a rising interest rate environment, all bonds lose money. Some lose a little, some lose a lot. But they all lose. You know, I've been using the word maturity in my explanation for you about interest rate risk.

Bond Maturity Dates vs Duration

 Actually, maturity is an inaccurate term. It's not the maturity date that you ought to be paying attention to about your bonds, you ought to be paying attention to the duration. And if you want my explanation on what duration is, just go to TheTruthAYF.com. There are so many other ways to generate income from investments. Bonds aren't the only way. There are dividend paying stocks. There are MLPs: master limited partnerships, typically in the energy sector. There are staking and lending with crypto and more. Talk to your financial advisor about protecting the money you have that you've got in bonds. Now your advisor might say, Oh, just take the long view. Yeah, sure. If you own a bond, yeah, wait for it to mature because you'll get all your money back with no loss. It doesn't matter what happens to interest rates, but if you continue to own a bond, you're going to continue to earn that very low interest rate between now and its maturity. And that interest rate you're earning is lower than what is available elsewhere in the marketplace.

If you've got a bond fund, there is no maturity date, so you can't sit and wait for something that'll never happen. Or you could just wait until interest rates fall back down to where they were because the bond's price will go back up as interest rates go back down. But we've never had such low interest rates in our nation's entire history as we've had in the past several years. To suggest that interest rates are going to go back down to where they were, that is a silly assertion. There's no evidence to support that idea, which means you might be waiting for something to happen that's never going to happen. So, yes, go talk to your financial advisor, but don't let your advisor be 'Pollyanna' about it. People are about to experience massive losses in their bond investments. You've already lost 11% in the past 15 months. That's how much the bond market is down since January of 2021. And if you don't know what's coming, the shock of the losses that you might experience might even be worse than the losses themselves. I'm Ric Edelman.