How Fed Chair Janet Yellen's Plans Will Affect Your Bonds

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Charles Dharapak/AP Federal Reserve chair Janet Yellen said in earlly May that she expects to keep short-term borrowing rates low for a "considerable time." She's continuing to set a target of seeing healthy employment numbers and inflation around 2 percent before raising short-term rates above their nearly 0 percent levels. While short-term rates will remain low, long-term rates are another story. The Fed is continuing to taper -- to reduce its purchases of U.S. government bonds. The Fed is expected to hold its existing bond portfolio for quite some time. Still, as it stops purchasing new bonds, it takes a very deep-pocketed buyer out of that market. That creates conditions wherein long-term rates will be much more likely to rise. And with the Fed expected to complete its taper this year, long-term rates may rise soon. What This Means for You The chart below shows the history of 30-year Treasury bond interest rates for the past few decades. While nobody is expecting rates to skyrocket to their 15 percent peak, note that before the recent recession and the Fed's long-term bond-buying spree, rates were around 5 percent or so. It's reasonable to anticipate that absent the Fed's incremental buying pressure holding down long-term rates, those rates may revisit that 5 percent level once the Fed stops buying. stlouisfed.orgChart from the Federal Reserve Bank of St. Louis, as of May 17. With 30-year interest rates currently around 3.4 percent, that suggests long-term rates may rise as much as 1.5 percentage points or so over the next few months. In the grand scheme of things, that may not sound like much, but if you own long-term bonds, that kind of rise may be quite painful indeed. The Rate and Price Seesaw