What Is The Relationship Between Rising Interest Rates And Bonds – LoanLove.com Explains

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A new guide from Loan Love takes a look a the inverse relationship between interest rates and bonds so that borrowers can better understand the background for today’s mortgage rate trends.

What is the relationship between rising interest rates and bonds? A new Loan Love guide titled “Rising Interest Rates And Bonds (Who’s To Blame?)” helps to answer this question and give some insight into the behind-the-scenes workings that contribute to what mortgage interest rates are available to borrowers today. This new guide continues to further LoanLove.com’s goal of empowering borrowers with first-class knowledge, valuable resources, and connections to top-rated industry professionals so that they will be able to find loans that they will love.

This newly featured guide from Loan Love is especially useful now, as mortgage interest rates have been pretty much unchanged over the past week or so. The information provided in this mortgage interest rates vs. bonds guide can help prospective borrowers to better predict when rates will start moving one way or the other so that they will be able to lock in the best possible home loan rate. Loan Love explains in this article:

Rising interest rates and bonds with declining values illustrate the unique relationship that exists between interest rates and bonds, but more importantly, it shows just how vulnerable bonds are to economic changes that can impact their value. It is no secret the Federal Reserve will be slowing its bond purchases while raising interest rates, with the end result expected to be lower prices for bonds. Often, investors see this as a sign to dump their bonds. But that isn’t necessarily the only choice. Fluctuations in interest rates come about due to a variety of economic factors. In fact, both short- and long-term rates are affected by such things as the strength of the dollar, inflation, and the overall pace of economic growth. Historically, when the Federal Reserve becomes concerned about inflation and fast economic growth, it will attempt to slow the pace by raising interest rates.”

Because of this inverse relationship between interest rates and bond prices – when bond prices go down, mortgage rates go up and vice versa – many investors see rising interest rates as a huge economic threat to their bond investments. For both those who own bonds, and everyday home buyers who wish to save money on their home loans, rising interest rates are bad news. For the homebuyer the implication is obvious – higher rates equal higher mortgage payments. For the investor rising rates mean that the bonds that they are holding will be worth less. However, Loan Love explains,

“But an increase in interest rates doesn’t necessarily have to harm your investment. If you are gong to hold your bonds till maturity anyway, the value isn’t going to change just because the interest rate bounces around. You’ll still end up with the amount promised to you when you purchased your bond, all other factors being equal. Things get a bit more complex, however, if you own bonds for investment purposes, where you buy and sell them just as you would stocks. In that case, interest rates become critical factors.”

The article goes on to explain some of the other factors playing into the rates vs. bonds issue then gives some insight into the current situation and how home buyers and bond investors are likely to be affected in the future. It says,

“The housing meltdown and economic downturn brought about historically low interest rates as part of the government’s attempts to heal the economy. The economic recovery has been steady, but slow, so that low interest rates remain even as the housing market has begun to gain strength. While it is expected that bonds will drop as interest rates rise, there is some evidence that investors need not necessarily begin selling their bonds. Historically, bonds have not done as poorly as expected during times of rising interest rates. Why? The key is likely the increasing yield the overall portfolio was able to earn. This was possible because as bonds matured, investors were able to take the proceeds and re-invest at higher interest rates. This strategy allows investors to more than cover the losses that came about because of higher rates.”

For more information on this topic, click here to read the full guide at LoanLove.com.

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Kevin Blue
Loan Love
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