When Will Interest Rates Head Up?

The Fed is keeping yields artificially low and shows no signs of changing course.

The question on just about every bond investor's mind is simply this: When will interest rates rise? With rates on most types of debt near record lows, it seems that rates have nowhere to go but up. That would send bond prices down. And with yields at such depressed levels, the amount that investors stand to lose from a jump in rates has grown (the lower a bond's yield falls, the more it will lose in price from a rise in rates).

The Federal Reserve, under chairman Ben Bernanke, is holding rates down two ways. It is keeping short-term rates near zero by targeting the federal funds rate, the rate at which banks lend money to one another overnight. And it is holding down long-term rates through monthly purchases of $85 billion worth of Treasuries and mortgage-backed securities. The Fed's actions have driven investors to look further afield for income, which has in turn pushed down rates on everything from junk bonds to municipal bonds.

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Elizabeth Leary
Contributing Editor, Kiplinger's Personal Finance
Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.