“Bond prices typically move inversely to interest rates. This means that as interest rates rise, the price, or value, of bonds will decrease. Higher interest rates mean higher current income for an investor purchasing new bonds,” Edward Jones explained.
“For investors who already own a significant amount of fixed income, rising rates and corresponding falling bond values may mean lower overall portfolio value. Shorter-term bonds, while offering lower income opportunities, are less impacted by the drop in bond value seen in longer-term investments,” the firm added.
The survey is a wakeup call because many Americans have piled into bonds after getting burned twice by stocks in the dot-com meltdown and the 2008 financial crisis. Also, aging Baby Boomers are gravitating to the income and perceived safety of bonds.
One-third of respondents in the Edward Jones poll between the ages of 18 and 34 replied they have “no idea” how interest rate changes will impact a portfolio. One-quarter of those 65 and older also indicated they had “no idea.”
iShares 20+ Year Treasury ETF
Full disclosure: Tom Lydon’s clients own TLT.