Ah, the ever-changing world of finance! Just when you think you’ve got it all figured out, the Federal Reserve throws a curveball, and suddenly, everyone’s scrambling to adjust their portfolios. As of the writing of this article the front page story on bloomberg.com is that most economists are expecting another 1/4 point rise at the Sept 20th meeting.
Let’s take a step back and look at the historical dance between bond portfolios and federal funds rate increases. Specifically, let’s dive into the bond portfolio adjustments for 2023 and see what lessons history has to offer.
A Blast from the Past
Historically, the relationship between bond prices and interest rates has been akin to a seesaw at a playground. When one goes up, the other goes down…but not always. This inverse relationship has been a cornerstone of bond investing for decades. In the 1980s, for instance, as interest rates soared, bond prices took a nosedive. Investors who were nimble and understood this dynamic were better positioned to navigate these choppy waters.
The 2023 Scenario
Fast forward to 2023, and we’re seeing some déjà vu. With the Federal Reserve hiking up the federal funds rate, the bond market is once again in a tizzy. But here’s the million-dollar question: When should investors be making bond portfolio adjustments for 2023 to ride this wave effectively?
Timing is Everything (Well, Almost Everything)
The key to successful bond investing in a rising rate environment is understanding duration. In layman’s terms, duration is like the “sensitivity meter” of a bond or bond portfolio to interest rate changes. The longer the duration, the more sensitive it is. Many financial advisors spent 2020 to 2022 shortening the duration of client bond portfolios. As interest rates rise, many of us are trying to lock in higher interest rates long term, but when is it best to flip the switch? Remember, while history can be a guide, it’s not a crystal ball.
Federal Reserve – Historical Rate Hikes and Bond Market Responses ↩
Diversification: The Spice of Investment Life
While adjusting the duration is one strategy, let’s not forget about diversification. By spreading investments across various bond sectors and maturities, one can potentially cushion the blow of rising rates. Think of it as not putting all your eggs in one interest-rate-sensitive basket.
At Deep Blue Financial, I tend to advise clients to take a multi quarter view to reblancing their portfolios. We break rebalancing up in to steps so that we attempt to capture higher interest rate bonds over a period of time rather than one fail swoop.
The 2023 Playbook
Given the rapid rate hikes we’ve seen, making bond portfolio adjustments for 2023 might seem daunting. But fear not! Here are some steps to consider:
Stay Informed: Keep an eye on the Federal Reserve’s announcements. They might not have a crystal ball, but they sure have a lot of data.
Re-evaluate Duration: Consider intermediate term bonds to lock in higher interest rates, but make sure to be comparing quality with other like bonds.
Diversify: Look at various bond sectors and maturities to spread out the risk.
Consult a Professional: While DIY is great for home projects, when it comes to your hard-earned money, it might be wise to consult a financial advisor.
The bond market might seem like a roller coaster at times, especially with the rate hikes of 2023. But with a bit of historical perspective and some strategic bond portfolio adjustments for 2023, investors can navigate this ride with a bit more confidence and maybe even a chuckle or two.