Sound Advice: September 17, 2024

Interest Rates Going Down. Long-Term Bonds Going Up. An Opportunity?

Following a lengthy period of relatively high interest rates set by the Federal Reserve Board to cool what had been runaway inflation, sparked largely by the impact of the Covid pandemic, the Fed is now ready to do an about-face. This may well be good news for the prices of long-term bonds.

Several decades ago, interest rates in the high single digits were more typical than not. Although it now seems hard to believe, rates actually peaked in the mid-teens at the start of the 1980s. That pretty much wiped out the pace of home sales, but it marked the beginning of a multi-decade easing of interest rates, which in turn set the stage for an extended span of unusual profiability for investors holding long-term bonds, the prices of which are most sensitive to changes in interest rates.

The chart below provides significant evidence of this sensitivity. It’s a reflection of the changes in the price of a exchange-traded long-term bond fund (TLT) to concurrent changes in the prime interest rate. The comparison is quite dramatic and could well be useful for those wondering how to take advantage of the upcoming easing by the Fed.

N. Russell Wayne

Weston, CT 06883

203-895-8877

www.soundasset.blogspot.com

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