“An initial rate increase could cause pain in the short term,” Joshua Barrickman, head of fixed-income indexing, Americas, at Vanguard Group, told the WSJ. “But over the long term, it will act to your benefit.”
In a hypothetical case where the Fed raises short-term rates by 0.25 percentage point in January and by a similar increments every other quarter through July 2019 for a total of 2 percentage points, the typical intermediate-term bond fund could lose 0.15% next year but generate positive yearly total returns thereafter, according to the Vanguard Group. Total returns include both the negative price change and income, so higher income generation may account for the positive total returns if bond prices fall in a rising rate environment.
However, if rates suddenly spiked, the funds would suffer steeper initial losses. The Fed, though, has repeatedly assured the markets that it will stick to gradual rate normalization.
“Intermediate-term bond-fund investors may feel a little sting, but it’s certainly not going to be a bleed-out,” Marilyn Cohen, chief executive at Envision Capital Management Inc., told the WSJ.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.