Rising Interest Rates
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- Опубліковано 28 лип 2024
- What to know about rising interest rates, the Fed, mortgage rates and changes in prices of bonds and bond funds
My video about bonds, bond prices and bond yields - • Bonds, Bond Prices, an...
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DISCLAIMER: This video is only helpful hints and education. It is not specific tax, legal or investment advice. Before considering acting on anything you see in this video, first consult with your tax, legal or investment advisor. While the information expressed in this video is believed to be accurate, neither Andy Panko, CFP®, RICP®, EA nor Tenon Financial LLC make any guarantees to its accuracy.
Was waiting to hear from you on this. Didn't disappoint--thanks for always cranking out the thoughtful videos!
I'm glad you liked it, thank you!
Thanks for that rundown, Andy.
I loves me some interest rates, Tim.
Very helpful and presented with clarity. awesome!
thank you!
Thanks for taking the time to explain all this. Rates, and how they correlate to various parts of the system, is confusing
Hopefully the video was straightforward enough. There are literally hundreds of different interest rates used throughout the industry and I could have talked for hours about all of them. I tried to keep it as short and relevant as I could!
Thanks for the clear explanations. Have you looked at the role the Fed's quantitative tightening will play on price of Treasury bonds? A major buyer of these over the past few years, through quantitative easing, recently announced that they plan to stop buying as much and in fact will eventually sell off what they hold. Full ramp-up of this reduced purchasing won't happen until September, but it begins June 1. When a major buyer of something decides to no longer buy as much, don't prices go down? Thus, even though the target rate is really short-term (overnight), QT will have some influence on longer-term rates.
Yes, that's a good point. Selling off bonds from the Fed's balance sheet can definitely lead to an increase in yields of those bonds (as the bond prices should theoretically have to come down from the increased supply in the market). But there will also be other market forces that impact the yields. Such as if/when the economy worsens and goes into recession. Then, there is generally increased demand for the "flight to quality" of investors wanting to own government securities. Depending how much demand increase there is vs supply increase, yields on bonds could go up, go down or stay flat-ish...TBD. Unlike with the Fed changing the Fed Funds rate, where it's without question a direct increase in rates whenever they choose to increase it.
Back in the early 80s money market interest rates were better than cd rates. Should we expect the same eventually? My guess is CD rates were federal insured.
It really depends on banks' demand for additional deposits. CDs are generally safer than money market because CDs 1) pay a known guaranteed rate over their stated life and 2) are federally insured up to a certain amount. So, all else equal, CDs should presumably pay less than money markets. But if banks have a lot of demand for deposits, the rates they pay on products like CDs can be higher than what money markets pay
Hi is there any resources you can provide like articles or research papers that explain treasury yields are a greater influence on bonds and bond fund prices than fed changing rates? I'm having a difficult time researching this and would greatly appreciate! Thanks
Hi. I wasn't aware of any in particular, but I did some Googling and found this, which addresses the topic fairly well: www.investopedia.com/articles/investing/101515/effect-fed-fund-rate-hikes-your-bond-portfolio.asp
Why do bond fund prices go down when the yield goes up? This seems counterintuitive.
Check out the link in the notes to the other video I did about bond, prices and yields. That will answer it exactly, with some pretty examples!
Because the bonds that your bond fund owns are now worth less because new bonds pay more interest.
For example if bonds are paying 1% and now they're paying 2%, nobody is going to pay full price for your 1% Bond
@@johngill2853 Yep, that's the conceptual reason why prices go down. But the more technical reason is the math behind how bonds are valued; they're just the sum of the present values of their various future cash flows. And higher discount rates (i.e. interest rates) lead to smaller present values and hence decreases prices.
@@RetirementPlanningEducation actually as far as a bond funds they are just the current market value. They are the same as stocks in regard to the price, every night an auditor figures out the fair market value of all the investments in your fund and figures out the Net asset value per share.
There is more involved than just cash flow of bond,for example the credit rating
@@johngill2853 That's correct. But the market value of each of the thousands of bonds in the fund is ultimately priced based on the prevailing yield to maturity for that bond that day. And those yields to maturity take into account credit ratings. Because the yields at which the cash flows of the bonds are discounted is a combination of 1) the "risk free" yield on Treasuries of comparable maturities plus 2) a "spread" of additional interest to account for the higher credit risk of the bond's issuer relative to the credit risk of the US Treasury.