Prices are rising everywhere with inflation. Except in your 401(k) | Personal finance

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BONDS LESS THREAT BY INFLATION

Bonds are supposed to be the safe part of anyone’s portfolio. But when inflation is high, the fixed payments they make in future years will buy fewer things.

Expectations continue to rise for how many times the Federal Reserve will raise interest rates this year to curb inflation, with consumer prices 7.5% higher in January than a year earlier . When rates rise, newly issued bonds pay more and bonds already in bond fund portfolios suddenly look less attractive, driving their prices down. Vanguard’s Total Bond Market Index fund has already lost 4.2% this year on Thursday.

It can be a shock to lose money on bonds, but investors shouldn’t give up on them, Chaudhuri said.

“At the end of the day, bonds always give you that ballast,” she said. “They are still that ultimate diversifier that will still work in an environment where stocks are falling significantly.”

Higher rates generally hit longer-term bonds harder because they lock investors into lower rates for longer. Shorter term bonds may offer some protection.

The US government offers bonds that protect against rising prices. When an investor buys Treasury inflation-protected securities, also known as TIPS, the principal rises and falls over time with the consumer price index. The same applies to interest payments based on this principal amount. The downside is that TIPS still offer negative yields, with 10-year TIPS lately hovering around -0.50%.

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