Interest Rate Risk

So far this year, investors have poured $113 billion into investment grade bond mutual funds. While such bonds appear to have a relatively low default risk in the current environment, the YTM on these bonds is close to a record low. The Federal Reserve has indicated that it plans to increase the Fed Funds rate, which will increase corporate borrowing rates as well. You should also be aware that the lower the current YTM, the greater the interest rate risk. Consider, in May and June 2013, investment grade bonds dropped five percent because of an increase in interest rates. Therefore, if interest rates do increase, investors may be in for a shock.