After dropping the benchmark federal funds rate to a rock-bottom range of 0% – 0.25% early in the pandemic, the Federal Open Market Committee has begun raising the rate toward more typical historical levels in response to high inflation. At its March 2022 meeting, the Committee raised the funds rate to 0.25% – 0.50% and projected the equivalent of six more quarter-percentage-point increases in 2022 and three or four more in 2023.1
Raising the federal funds rate places upward pressure on a wide range of interest rates, including the cost of borrowing through bond issues. Regardless of the rate environment, however, bonds are a mainstay for investors who want to generate income or potentially dampen the effects of stock market volatility on their portfolios. You may have questions about how higher rates could affect your fixed-income investments and what you can do to help mitigate the effect in your portfolio.
Rate sensitivity
When interest rates rise, the value of existing bonds typically falls, because investors would prefer to buy new bonds with higher yields. In a rising rate environment, investors may be hesitant to tie up funds for a long period, so bonds with longer maturity dates are generally more sensitive to rate changes than shorter-dated bonds. Thus, one way to address interest-rate sensitivity in your portfolio is to hold short – and medium – term bonds. However, keep in mind that although these bonds may be less sensitive to rate changes, they will generally offer a lower yield than longer-term bonds.
A more specific measure of interest-rate sensitivity is called duration. A bond’s duration is derived from a complex calculation that includes the maturity date, the present value of principal and interest to be received in the future, and other factors. To estimate the impact of a rate change on a bond investment, multiply the duration by the expected percentage change in interest rates. For example, if interest rates rise by 1%, a bond or bond fund with a three-year duration might be expected to lose roughly 3% in value; one with a seven-year duration might fall by about 7%. Your investment professional or brokerage firm can provide information about the duration of your bond investments.
If two bonds have the same maturity, the bond with the higher yield will typically have a shorter duration. For this reason, U.S. Treasuries tend to be more rate sensitive than corporate bonds of similar maturities. Treasury securities, which are backed by the federal government as to the timely payment of principal and interest, are considered lower risk and thus can pay lower rates of interest than corporate bonds. A five – year Treasury bond has a duration of less than five years, reflecting income payments received prior to maturity. However, a five-year corporate bond with a higher yield has an even shorter duration.
When a bond is held to maturity, the bond owner would receive the face value and interest, unless the issuer defaults. However, bonds redeemed prior to maturity may be worth more or less than their original value. Thus, rising interest rates should not affect the return on a bond you hold to maturity but may affect the price of a bond you want to sell on the secondary market before it reaches maturity.
Bond funds, mutual funds and ETFs composed mostly of bonds and other debt instruments, are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. Thus, falling bond prices due to rising rates can adversely affect a bond fund’s performance. Because longer-term bonds are generally more sensitive to rising rates, funds that hold short- or medium-term bonds may be more stable as rates increase.
Bond funds generally do not have set maturity dates, because they typically hold bonds with varying maturities, and they can buy and sell bonds before they mature. So, you might consider the fund’s duration, which takes into account the durations of the underlying bonds. The longer the duration, the more sensitive a fund is to changes in interest rates. You can usually find duration with other information about a bond fund. Although helpful as a general guideline, duration is best used when comparing funds with similar types of underlying bonds.
A fund’s sensitivity to interest rates is only one aspect of its value – fund performance can be driven by a variety of dynamics in the market and the broader economy. Moreover, as underlying bonds mature and are replaced by higher-yielding bonds in a rising interest rate environment, the fund’s yield and/or share value could potentially increase over the long term. Even in the short term, interest paid by the fund could help moderate losses in share value.
It’s also important to remember that fund managers might respond differently if falling bond prices adversely affect a fund’s performance. Some might try to preserve the fund’s asset value at the expense of its yield by reducing interest payments. Others might emphasize preserving a fund’s yield at the expense of its asset value by investing in bonds of longer duration or lower credit quality that pay higher interest but carry greater risk. Information on a fund’s management, objectives, and flexibility in meeting those objectives is generally spelled out in the prospectus.
If you have questions about rising rates and how they may impact your portfolio give us a call.
Have a great weekend!
The return and principal value of individual bonds, UIT units, and mutual fund and ETF shares fluctuate with changes in market conditions. Fund shares and UIT units, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. ETFs typically have lower expense ratios than mutual funds, but you may pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares. UITs may carry additional risks, including the potential for a downturn in the financial condition of the issuers of the underlying securities. There may be tax consequences associated with the termination of the UIT and rolling over an investment into a successive UIT. There is no assurance that working with a financial professional will improve investment results.
Source: Broadridge
Golf Tip of the Week
How to hit a short bunker shot and make it stop
For most amateurs, it’s tough enough getting the ball up and out on a standard greenside bunker shot. What do you do if you find yourself up near the face of the bunker, with very little green to work with?
First of all, don’t panic. This shot is much easier to pull off than one to the far side of the green or, even tougher, from 40 or 50 yards out. Secondly, understand that to hit this little shot, you’re going to have to make some tweaks to your setup to get the ball up fast. “Short-sided bunker shots are all about delivering maximum loft so you can get the ball to launch high quickly and then land on a very soft, vertical angle,” says Mark Blackburn, one of Golf Digest’s 50 Best Teachers.
Blackburn focuses on some things you can do at address to exaggerate the height and finesse on this shot. Start by opening the clubface before you take your grip, Blackburn says. Then, widen your stance and add some knee flex to lower your body toward the sand. Finally, lean the handle back, away from the target. This helps shallow out your angle of attack – so you don’t take too much sand – while delivering maximum loft.
Make these setup adjustments, and the swing is pretty simple. Just rotate the clubface more open on the backswing, feeling like the toe is turning toward the ground as you go back. Coming down, keep up your speed, and slide the face under the ball, entering the sand about two inches behind it. In no time you’ll be able to hit high, soft shots like the best players in the world.
Tip adapted from golfdigest.comi
Recipe of the Week
Herby Everything Cheddar Swirl Buns
12 Rolls
Ingredients
- 1 cup warm whole milk
- 1 tablespoon honey
- 2 eggs, beaten
- 2 tablespoons butter, melted
- 3 ½ – 4 cups all-purpose flour
- 1 packet (2 1/4 teaspoons) instant dry yeast (see notes for no yeast option)
- 1/2 teaspoon kosher salt
- 2 cups shredded cheddar cheese
- 1 tablespoon fresh thyme leaves (or 2 teaspoons dried thyme)
- 2 tablespoons everything bagel spice
- 1/2 teaspoon crushed red pepper flakes
- 1/4 cup basil pesto, homemade or store-bought
Instructions
- In the bowl of a stand mixer, combine the milk, honey, eggs, butter, 3 ½ cups flour, yeast and salt. Using the dough hook, mix until the flour is completely incorporated, about 4-5 minutes. If the dough seems sticky, add the remaining ½ cup of flour.
- Cover the bowl with plastic wrap and let sit at room temperature for 1 hour or until doubled in size.
- Meanwhile, make the filling. In a small bowl, combine the cheddar, thyme, everything bagel spice, and crushed red pepper flakes.
- Preheat the oven to 350 degrees F. Line a 9×13 inch baking dish with parchment.
- Lightly dust your work surface with flour. Turn out the dough, punch it down, and roll it into a rectangle about 10 x 16 inches. Spread the pesto evenly over the dough. Sprinkle the cheddar mix evenly over the pesto, lightly pushing it into the pesto. Starting with the long edge closest to you, carefully roll the dough into a log, keeping it fairly tight as you go. When you reach the edge, pinch along the edge to seal. Using a sharp knife, cut into 12 rolls. Place the rolls in the prepared baking dish. Cover with plastic wrap and let rise 20-30 minutes. Alternately, you can let the rolls sit in the fridge overnight.
- Bake the rolls for 20-25 minutes, or until the cheese is bubbling. Serve warm and enjoy.
No Yeast Option: If you do not have access to yeast or simply cannot use, you can omit the yeast and instead use 1 1/2 teaspoons baking powder and 1 teaspoon baking soda, added with the flour. You can skip the rising and instead just let the dough rest 30 minutes, then roll, rest again another 15-20 minutes, then bake. The rolls will be a little less fluffy but will be great!
Recipe adapted from halfbakedharvest.comii
Health Tip of the Week
5 Causes of Hives You Wouldn’t Expect
Those itchy red welts can be brought on by more than just pet dander and pollen.
Breaking out in hives, medically known as urticaria, is the worst. Your skin itches all over, you’re covered in unsightly red welts, and if that weren’t bad enough, it’s not always clear what might have triggered them.
What we do know: Hives can appear anywhere on the body, including your face, torso, arms, legs, and even inside your mouth and ears. They may range in size from as tiny as a pencil tip to as large as a dinner plate. Hives typically crop up when you have an allergic reaction to a substance -like pet dander, pollen, or latex—triggering your body to release histamine and other chemicals into your blood. That’s what causes the itching, swelling, and other symptoms.
Whether someone falls into the category of acute hives (lasting six weeks or less) or chronic hives (more than six weeks), there are some concrete causes of those pesky red bumps.
- Your diet
- The great outdoors
- An underlying illness
- Your daily workout
- Emotionally charged situations
Tip adapted from health.comiii
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Source:
1) Federal Reserve, March 16, 2022
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Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.
Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
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i https://www.golfdigest.com/story/how-to-hit-a-short-bunker-shot-and-make-it-stop
ii https://www.halfbakedharvest.com/herby-everything-cheddar-swirl-buns/
iii https://www.health.com/condition/allergy/hives-causes
