The year 2022 was possibly the worst year in history for U.S. bonds, largely due to the Fed spiking interest rates to combat inflation so drastically.
“Market values of bonds act inversely to interest rates on the market,” Rajat Soni, CFA and personal finance expert, told GOBankingRates. “When rates increase, market values of bonds decrease. When rates decrease, market values of bonds increase.”
But now, with the Federal Reserve indicating that they will slow down the pace of interest rate hikes, this could be a historically significant time to buy bonds.
“The Fed’s rate hikes have a direct impact on the yield of bonds, and as the rate hikes slow down, the yields on bonds will become more attractive to investors,” said Andrew Lokenauth, a personal finance expert and the founder of Fluent in Finance. “The recent slowdown in the economy has resulted in a decrease in inflation, which is also a factor in the Fed’s decision to slow down rate hikes. A lower inflation rate means that the value of your money remains stable, and your bond investment will retain its purchasing power over time. This, combined with the low yields offered by other investment options such as savings accounts and money market funds, makes bonds an attractive option for anyone looking to generate passive income.”
Bonds are often a top choice for investors in a portfolio as they provide a steady stream of passive income and tout some stability, along with diversification.
“Bonds have always been considered a safe and secure investment option, providing a steady stream of passive income in the form of regular interest payments,” Lokenauth said. “It’s also worth noting that bonds offer a level of diversification in your investment portfolio. By investing in a range of different bonds, you can reduce the risk of your portfolio being heavily impacted by market fluctuations or economic downturns.”
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