While the sharpness of the bond sell-off may partly be a knee-jerk reaction to an anticipated Fed move, it illustrates the potential losses that can occur in fixed income investments -- particularly in bond funds.
As seasoned investors know, bond prices fluctuate with interest rates. If rates go up, the value of bonds declines. This isn't a problem with individual bonds if you hold them to maturity. As long as the company doesn't default, you'll always get your money back, plus the coupon interest.
With bond funds, however, there is no maturity date or par value. The fund's price, or (NAV), depends on the current value of the bonds in the underlying portfolio, and in a negative bond environment, that could be much lower than your initial investment.
The critical question for bond holders is, "Where are interest rates headed in the future?" Bond funds tend to thrive when inflation pressures and interest rates are low or declining, which has been the case over the past 30 years.
Interest rates today are at the lowest level in decades, with the yield on the ten-year bond well below the 50-year average of 6.6%.
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