The Retiree’s Conundrum

imagesP250QAG0Most retirees have investment goals of protecting their nest egg, but many also have income needs from their portfolios. Everyone is aware that stock indexes are at record high levels and interest rates are near historical lows. The safest investments like bank CDs and short-term treasury securities have extremely low yields that are below the rate of inflation. The story for treasury securities with longer duration isn’t much better: 10-year treasuries currently yield 2.42% and 30-year treasuries yield 3.17%.

Many analysts feel that interest rates will return to normalized levels over the next few years. BNY Mellon Chief Economist, Richard Hoey, wrote in September of 2013 that he expects, “10 year treasury bond yields to rise to near 5% in 2017.”

What would this do to the prices of bond funds and other fixed income or yield-based investments? On broker-dealer regulator FINRA’s website in a piece on duration and rising rates effects on bond prices, FINRA states that, “a bond fund with a 10 year duration will decrease in value by 10% if interest rates rise one percent.” Hoey is looking for a 2.5% rate rise on the 10 year treasury by 2017.

This could affect other investments that rely on yield in a similar fashion like MLPs, REITs and stocks that pay relatively high dividends but show little growth. Obviously, if an investor holds individual bonds to maturity absent a negative credit event then he will get full value at maturity. If he bond the bond at a premium (above face value), then he would stand to lose that premium.

While interest rates could remain at low levels for a long time, we believe that this is a time to be very careful with fixed income investments and to understand, or have an advisor that understands, what may happen if interest rates rise. Investors may have unrealistic expectations in relation to the risk associated with potential interest rate increases on investments they perceive as safe.

JamesMathisJames Mathis, managing partner of Echelon Investment Management, believes in enriching his clients’ lives by identifying, preserving and achieving their goals. Echelon partners with clients through every leg of their race ~ asset management, investment advice and retirement planning. Contact him at

Disclaimer: The author has no stock positions in the companies he mentioned in this article, but could add positions to his own account or to accounts where he has trading authority in the future.