When interest rates go up, bond funds lose money. This is called interest rate risk.
For example, in the early 90s, the 10-year Treasury went from about six percent to about eight percent in one year. That rise in interest rates resulted in losses of, in our opinion, as much as 20 percent in various bond funds. In the late 90s, when interest rates on the 10-year Treasury went from around four percent to around six percent, there was an average loss of about 17 percent.
Salesmen at banks and brokerages who are not acting in your best retirement interests may claim that bond funds are safe money. But, when interest rates go up – and they eventually will — interest rate risk may devastate people who own bond funds. That’s not your safe money for retirement. Your safe money is supposed to protect you from, not only stock market losses, but from the impact of rising interest rates on bond funds.
