Bond Investors Don’t Need to Fear Rising Rates | American Funds

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Sustainable Income  |  bonds  |  october 2015
Bond Investors Don’t Need to Fear Rising Rates

Over Two-Year Periods, Bond Returns Have Been Mostly Positive, Even During Fed Tightening Cycles

High-Quality U.S. Bonds Can Provide a Cushion Against Losses in Other Parts of a Diversified Portfolio

Sources: Federal Reserve, Barclays

U.S. economic growth has rebounded following a weaker-than-expected first quarter. The remainder of the year could see stronger growth than the first half as long-term trends in key indicators, such as employment and housing, continue to reflect an improving economy.

As the Federal Reserve seeks to normalize monetary policy, U.S. interest rates are expected to head higher; however, the pace of rate increases may be slower than many investors expect. Turmoil in China, Greece, the Middle East and elsewhere is keeping a lid on U.S. rates as investors flock to buy safe-haven U.S. Treasuries.

Despite losing some ground against other currencies during the second quarter, the U.S. dollar has strengthened significantly over the past 12 months, driven by the stronger relative economic position of the U.S. Given the imbalances that still exist in the global economy, continued pockets of dollar strength may be a feature of the investment landscape over the medium term.

While it is true that rising interest rates hurt bond prices in the near term, it is important to remember that over the long term, higher rates can be beneficial for fixed-income investors. As bonds are sold or reach maturity, the proceeds can be reinvested in less expensive bonds at higher yields, which can help offset the impact of price declines.

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