Don’t Expect a Bond Crash

Posted on August 26, 2013
Filed Under ETFs, Fidelity Funds, Fidelity mutual funds, Investment Strategy, Mutual Funds, Personal Investing

 

A number of clients have been asking about the risks involved with bonds and bond funds, now that it appears interest rates may start to rise. After all, they correctly point out, when rates rise, bond prices fall. Jack Bowers has touched on this in the newsletter, and I want to amplify and add to some of his comments.

Yes, if you take the word of countless prognosticators in the financial media, bond funds are in for a crash. The thinking is that rising interest rates and inflation will combine with a weakening dollar to slam bonds. Such predictions are not supported by the evidence.  It’s true that bond funds may have less than stellar performance, possibly even for several years. But they will continue to play a critical role in your investing success.

Why are the predictions of doom for bonds off target? For one thing, inflation fears are very likely exaggerated. It’s true that the Federal Reserve is attempting to increase inflation in order to spur spending, in the hope of creating jobs. But inflation is likely to be kept under control by counterbalancing forces. One is consumer spending power: As technological advancements boost productivity, and as older workers leave the workforce, less money will be spent on buying goods and services. And that means less fuel for inflation.

What about soaring interest rates? That’s not a likely scenario this soon after our real estate meltdown. Demand for loans is being suppressed because homeowners—Baby Boomers especially—are focused on paying off mortgage debt rather than adding more. The result is that interest rates may rise only a bit faster than inflation.

A seriously weakening dollar looks unlikely as well. The United States is on track to produce nine million barrels of oil a day and our trade deficit is shrinking. Gasoline and food exports by themselves are enough to sustain the value of the dollar.

So stay the course and hold on to your Fidelity bond funds. Their performance may be weak for a while. But they may well keep up with inflation, even as they serve their critical role as cushioning against stock market volatility in your portfolio.

The above is intended for general investment purposes and is not meant to be construed as specific investment advice.

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