Historically, investors are compensated for taking on more risk and when it comes to fixed income (bonds), this manifests itself in the form of higher interest rates on longer-term bonds compared to shorter-dated issuances. The same thing can be said for Certificates of Deposit. However, as you can see from the chart below, this is not currently the case as the rates paid on U.S. Treasury securities decreases as the maturity date lengthens.The cause of an “inverted yield curve” results from the expectation that interest rates will fall in the future, that economic conditions will weaken or simply, a greater demand for securities with little risk that will produce income.
This inversion of the norm results in reinvestment risk or the possibility that the interest rate your security will renew at will be substantially lower than that received at the time of the initial investment. What to do? Create a ladder of bonds or CD’s.Creating a ladder of bonds entails purchasing multiple bonds with staggered maturity dates in order to manage reinvestment risk and interest rate risk, all the while providing a steady stream of income along with the liquidity necessary for your particular situation.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
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