There is little question that interest rates would be significantly higher in the absence of Fed purchases.
It is important to understand how potentially damaging a long-duration strategy could be in this environment.
The duration, or sensitivity to rate movements, of a 10-year Treasury bond is about nine years, which means that an increase in rates of just 100 basis points would result in an approximate 9% drop in the value of that bond.
For investors purchasing bonds outright who are willing to hold their positions until maturity, that may not be a concern. But investors with broadly diversified portfolios who need even a moderate degree of liquidity should be mindful of their duration exposure in this environment.
For informational purposes only. Not an investment recommendation.
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Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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