As Interest Rates Fall, Bonds Become a More Attractive Investment
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What is the main topic discussed in this episode?
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Here's your Money Briefing for Thursday, September 26th. I'm J.R.
How are falling interest rates making bonds more attractive to investors?
Whelan for The Wall Street Journal. When it comes to investing, stocks often overshadow bonds in getting most of the attention. But with economists expecting more interest rate cuts in addition to last week's move by the Federal Reserve, bonds are grabbing a piece of the spotlight.
Bonds historically are considered to be the safer option. and more boring part of an investor's portfolio, there is definitely the risk of loss, especially in corporate bonds. But in the treasury space, bonds are considered nearly risk-free.
Why do existing higher-yield bonds gain value when the Fed cuts rates?
We'll talk to WSJ reporter Vicky Huang after the break.
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Falling interest rates mean that bonds may be an attractive investment again. Wall Street Journal reporter Vicky Huang joins me. Vicky, help us understand the basics for a moment. How do lower interest rates boost bonds as an investment option?
So lower interest rates boost bonds because we have bonds that were already issued in the past when interest rates were high. So those bonds were issued with higher interest. interest payments.
Could continued Fed rate cuts push investors from short-term cash into longer-term bonds?
So those bonds pay more interest income to you as an investor. And when the Fed lowered interest rate last week, the short-term interest rates became lower. So we have newer bonds that are issued with lower interest rates. And this means that the existing bonds that were issued with higher yields or higher interest payments all of a sudden became a lot more attractive to investors. So those demands help drive up the price of those existing bonds.
If the Fed continues to lower rates, could we see more of a push into the bond market?
Yes. If the Fed continues to lower short-term interest rates, we could see investors going into intermediate-term or even longer-term bonds more and more. So far, a lot of investors for the past few years have piled into short-term treasuries and cash-like investments such as money market funds because short-term interest rates have have been historically high for the past few years given the Fed's campaign to raise interest rates and combat inflation.
How do bonds differ from stocks in risk and return profile?
If the Fed continues to lower interest rates, the interest income that investors are able to earn from short-term treasuries and other cash-like holdings will shrink as interest rates become increasingly lower.
How do bonds differ from stocks?
So stocks are basically an investor's bet on how the company might fare in the future. So investors who buy the stock of a company are betting on how well the company can perform. And they basically stand to lose money. their entire investment. If something wrong happens with a company and the stock falls to zero. But bonds are essentially the loans that investors give to a company or the state or local government. In most scenarios, investors can expect to get at least some of their principal back, even if something happens to the issuer of the bond.
Which particular types of bonds do advisors suggest that people take a look at in this environment?
So there are many different types of bonds to investing. A lot of financial advisors recommend their clients to stick to treasuries and specifically in this environment, intermediate term or longer term treasuries because treasuries Treasuries are essentially risk-free investments because they're backed by the U.S. government. But if you're reaching for more yield, more returns, you might look at corporate bonds.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:00–0:37
2
How are falling interest rates making bonds more attractive to investors?
0:37–1:13
3
Why do existing higher-yield bonds gain value when the Fed cuts rates?
1:13–2:15
4
Could continued Fed rate cuts push investors from short-term cash into longer-term bonds?
2:15–3:29
5
How do bonds differ from stocks in risk and return profile?
3:29–5:04
6
Which types of bonds are advisers recommending in a falling-rate environment?
5:04–6:27
7
How long should investors typically hold bonds and what does 'hold to maturity' mean?
6:27–7:33
Speakers
3 identifiedMore from WSJ Your Money Briefing
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