For bond investors, 2022 was a year to forget — interest rates skyrocketed and the general rule is that for every 1% increase in interest rates, the bond’s price moves 1% in the other direction for every year of its life. This means that bonds with with lower durations have less sensitivity to interest rate changes.
There is good news for bond enthusiasts, though — BlackRock thinks that 2023 will be significantly better for the bond market.
For more help with investing, consider working with a financial advisor.
Interest Rate Background
During the COVID-19 pandemic, the Federal Reserve drastically dropped interest rates, going down to 0% in March 2020. This was to stimulate the economy and help get money into people’s hands during a time when many were out of work. The low interest rates combined with other factors created very high inflation. In response, the Fed raised interest rates several times, with rates currently sitting at 4.25%.
Higher interest rates combat inflation by making it more difficult to get money. As noted above, it also has a serious impact on the bond market.
Bond Market 2023
While inflation is still a problem, it has slowed in recent months. In response, it’s expected that the Fed will raise rates more slowly or stop completely. This will mean bonds stop losing value.
There’s another reason the bond market looks stronger for 2023 — new bonds are paying coupons of 4%, compared with just 2% a year ago. This means that even if rates do go up, causing bond value to go down, they will still be worth more than they would have been last year.
The Bottom Line
Bonds took a beating in 2022. There is good news on the horizon for 2023, though — coupon rates are higher and the Fed figures to raise interest rates more slowly than last year. If bond investing is something that you’re interested in, now may be the time to get going.
Bond Investing Tips
- A financial advisor can help you make the right decisions about bond investing and other financial questions. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know what an investment will be worth down the road, get a sense using SmartAsset’s free investment calculator.
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