Bond Funds are Falling – What’s in Your Plan?

Interest rates are rising, not because the Federal Reserve isn’t trying to do everything in its power to keep them low and finance an explosion in federal debt, but because the “bond vigilantes” are revolting based on a rising inflation rate and a massive 25% increase in total federal debt in the last 12 months alone, with an additional $3 trillion in spending proposed.

Of course, as interest rates rise, bond prices fall. Many bond funds, usually leaned on for low risk compared to stocks, have seen 6%-7% drops so far this 1Q 2021. This year may end up being the first double-digit negative return for bonds in a very long time. But, given the course of things in Washington, more could surely follow. That will shock a lot of 401(k) participants who are relying on bonds to keep their money intact for retirement. Those in short-term target date funds are also vulnerable, since bonds make up a very significant portion of those funds.

So, what is your plan’s safe haven? Do you have a guaranteed fund with a stable price? Do you have any alternative funds that would provide income with continued low volatility like say a long-short fund, a market-neutral fund, some of which have positive returns of several percent in this down bond year?

If you don’t, you might want to revisit the fixed income portion of your investment lineup, the portion that is usually the least examined and weakest part of most 401(k) plans I review.

You should also educate your work force on the risk in bonds, something of which they may be unaware. Then highlight some alternatives if you have them. If you don’t, you’d better get busy.

Which raises another point – has your current investment advisor talked to you about this? If not, give me a call.