FINRA has issued an investor alert about the bond market. The regulatory authority warned investors that when interest rates begin to rise, outstanding bonds with low interest rates and high duration may experience significant price drops.
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The market value of a bond with a 10-year duration will drop 10% if interest rates increase by 1%.
The warning encourages bond-fund investors to check the fund’s fact sheet to find out the duration of its bonds.
Investors in individual bonds should consult with either their investment professionals, the bond’s issuer, or to use an online calculator to determine the duration of their bond holdings.
Short duration also does not mean the bonds are risk free. Multiple risks can affect bond market values including inflation risk, call risk, default risk, and others.
Investors in bonds tend to think they are safe havens because the securities have a maturity date, are rated for credit quality, and pay a steady rate of interest.
It can be easy for some investors to assume these characteristics are similar to a bank certificate of deposit and are backed by federal deposit insurance.
With so many being issued in the media about the bond market, it’s a great time to review your clients’ bond holdings, the reasons for having bonds in their portfolios, and to educate them
on strategies for managing risks they may not be aware of.