Yesterday we discussed how it is time to refinance your mortgage. With rates sure start moving upwards in the United States of necessity, it is time to start thinking about your mortgage payment and your cup bond exposure.
The market is expected now that the Federal Reserve will push interest reference rates increasing from February 2012. This expectation is mainly a price on bond markets, which are beginning to reflect that the yield curve may soon happen.
Investors would do well to begin to reduce their bond exposure, especially towards the end of the yield curve long.
We will show an example of how the convexity of long-term bonds may throw a fork into your savings:
corporate bond 30 years
Assuming that you have a duty of 30 years corporate which has just been published with a nominal rate of interest of 6% and a pricetag of $1,000, you have tons of exposure to the higher rates.
If a year from now, rates rise 1% overall, binding will be dropped with a value of $1000 to $877.83. You would have obtained 6% interest, so your actual value is $930…a loss of $70 even with the payments of interest.
If two years, the rates are higher than 2% in all areas, your link would be $790, more than $120 in interest payments. THus, your actual loss is $ 90 against a current $ 790 over market value $ 120 in payments of interest.
Move before everyone: it is not logical to have the long end of the yield curve, not any how low short term rates are now. It is time to withdraw to your exposure, because you know not to get hit in the short term when rates rise…and they will be.
Obligations, invest, convexity, rate hikes, obligations to sell, yield curve
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