June 6 - Warnings are heating up that as debt rates rise, fixed income investors could get scorched. Bobbi Rebell reports.
Life's been a beach for bond investors in recent years- with seemingless endless sunny days of lower and lower rates. But the tide will eventually rise- and many experts are starting to warn investors to beware the lurking dangers of the bond market. TD Ameritrade CEO Fred Tomczyk: SOUNDBITE: FRED TOMCZYK, CEO, TD AMERITRADE (ENGLISH) SAYING: "I think the biggest risk that we are worried about today is people that are in fixed income- to make sure that they understand what happens to fixed income products when interest rates do turn, because I think you know there could be some surprises." When rates rise, while an individual bond could reach maturity, many bond investment funds could take serious hits. FINRA CEO Richard Ketchum: RICHARD KETCHUM, CEO, FINANCIAL INDUSTRY REGULATORY AUTHORITY (ENGLISH) SAYING: "If interest rates start to go up that bond fund will lose value, most likely, and it will and the manager of that bond fund will turn over the investments so that will be a loss that won't be regained unless the market reverses and bonds rise. there will be no opportunity to hold your bonds to maturity." The search for yield can be dangerous says Raymond James CEO Paul Reilly: SOUNDBITE: PAUL REILLY, CEO, RAYMOND JAMES (ENGLISH) SAYING: "A lot of people don't understand the duration risk in their fixed income investments and maybe in the bonds they hold, but it may be in products, in structured products that between leverage and the duration in the product they don't understand that they could lose principal if they had to sell those as interest rates rise." And its not just individual investors that are at risk- so are corporations: RICHARD KETCHUM, CEO, FINANCIAL INDUSTRY REGULATORY AUTHORITY (ENGLISH) SAYING: "Whether it be investment grade vehicles whether it be high yield vehicles and it can raise additional issues from the standpoint of companies that now have much more substantial interest payments to make to the extent that they have floating rate payments. That can raise new questions with respect to credit risk with respect to those companies." And that in turn could impact the value of the company's stock as well- creating an even bigger wave of risk for investors.