Risk 4: What if a bear market in bonds arises? Many people think of bonds as safe investments—and, for decades, they have been. The current bull market in bonds began in 1982, when the 10-year Treasury note yield was 14%. Today, bond rates are low and are likely to rise. 8
When bond rates move higher, bond prices move lower. A bond’s duration provides some insight into how much its price may change. For example, a 10-year bond with a 10-year duration will lose about 10% of its value if rates rise by 1%.
Hypothetical Illustration:
PERCENT CHANGE IN BOND PRICES IF RATES RISE BY 1% 9
2-YEAR DURATION
4-YEAR DURATION
6-YEAR DURATION
8-YEAR DURATION
10-YEAR DURATION
20-YEAR DURATION
-2 %
-4
%
-6
%
-8
%
-10
%
-20 %
8 Board of Governors of the Federal Reserve System, 10 Year Treasury Constant Maturity Rate 9 Duration - What an Interest Rate Hike Could Do to Your Bond Portfolio, FINRA. Accessed July 2020
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