Why all of this talk about bonds?

Interest rates have been kept in check for a number of years, not being allowed to rise and fall as they normally do. Bond prices, whether it is an individual bond or a bond fund, move in the opposite direction to those rate changes. Rates are apparently going to be allowed to increase some time early next year. With all of the current talk about this topic, I thought I’d share an email conversation I had today with a client.

Client:
Nancy, as you know, we do need the income from the shares so where does that
leave us when the bonds go down?

My Reply:
If you are concerned about receiving income, you care about your share balance, not if the value of the fund is going up or down. We do not want to have funds with long term maturity because the value will not react as quickly as those with shorter term maturity… But really, you want the income; you do not care as much about the value.

Client:
Yes, you are right, I do want and need the income now and in the future.

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