Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson-Hurst:
It’s now time for 4 Your Money. We’re joined by David Nelson, CEO of NelsonCorp Wealth Management. Welcome back, David.
David Nelson:
Thank you, Brandy.
Brandy Auterson-Hurst:
So we talked last week about interest rates falling and how that could benefit investors who own bonds. Where do you see the most opportunity in the fixed-income space?
David Nelson:
That is a great question, and certainly we’re starting to see it already this year. As we discussed last week, rates are falling and bonds year-to-date are rallying, so we’re seeing some nice movement as far as there. What’s really important in the chart that I brought along today, again, a nice visual to try to illustrate here, the blue line is actually looking at the yield curve as far as for the bond market. On the left, it’s looking at short maturity type bonds, so a two-year, on the far right it’s looking at 30 year bonds, and what the red line is illustrating here is essentially how high rates can go if interest rates were to go higher yet, which again, we’re not sure as far as that’s going to take place, we kind of doubt it, but if they were to go up, how high can interest rates go up from here if you were to buy a bond today and rates go up on you?
And what you see in the left is a pretty big gap between, so rates could actually go up another 2%, give or take, and you still would have a positive return on a two-year bond. Now contrast that to about the middle of the slide there, where it’s looking at a 10-year bond, and if interest rates were to go up a half a percent on a 10-year bond and you owned it, let’s say now, and rates went up a half a percent, you would actually have a negative return as far as for the year. And on the far right, it’s even more extreme, that’s 0.2% it can go up and you’re going to lose money.
Brandy Auterson-Hurst:
All right, so how could viewers use this information when making investment decisions in their portfolios?
David Nelson:
It’s crucial to understand the type of bond. People in the past thought bonds were bonds, well, they’re not, and again, really important to do your homework looking at bonds going forward.