UPDATE 11.18.22: After recent inflation index reports, markets have rallied under the assumption that perhaps Federal Reserve rate hikes may decelerate. Federal Reserve Presidents James Bullard (St. Louis) and Neel Kashkari (Minneapolis) have come out to pour cold water on those assumptions. Bullard suggested the Fed funds rate “has not yet reached a level that could be justified as sufficiently restrictive. To attain a sufficiently restrictive level, the policy rate will need to be increased further.” Kashkari later told the Minneapolis Chamber of Commerce that “I need to be convinced that inflation has at least stopped climbing, that we’re not falling further behind the curve, before I would advocate stopping the progression of future rate hikes. We’re not there yet.”
UPDATE 8.25.22: As the Fed raises rates at speeds not seen for quite some time, the information below on duration becomes even more important to understand.
Originally posted on March 31, 2021.
- COMPOUNDING
- INTEREST
- DIVIDENDS
- DURATION
While no one can predict the future direction of interest rates, examining the “duration” of each bond, bond fund, or bond ETF you own provides a good estimate of how sensitive your fixed income holdings are to a potential change in interest rates. Investment professionals rely on duration because it rolls up several bond characteristics (such as maturity date, coupon payments, etc.) into a single number that gives a good indication of how sensitive a bond’s price is to interest rate changes. For example, if rates were to rise 1%, a bond or bond fund with a 5-year average duration would likely lose approximately 5% of its value.
BY FIDELITY LEARNING CENTER
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