I noticed that when interest rates went up, my 401k bond market funds went into the toilet. It seems there is an inverse correlation between the two that I don't fully understand. But if you want to make up for the lower interest rates, look into a bond fund. They are less volatile than stocks and may be attractive in your stage of life.
I asked AI to explain why this is and received the following:
While it might seem counterintuitive, there's a simple reason why bond prices and interest rates move in opposite directions.Think of it like this: When interest rates rise, newly issued bonds offer a higher interest rate to attract investors. This makes older bonds with lower interest rates less attractive. To compete, the price of these older bonds must decrease.Here's a breakdown:
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[*]Interest Rates Rise: The Federal Reserve increases interest rates to curb inflation or other economic factors.
[*]New Bonds Become More Attractive: Investors can now get higher returns from newly issued bonds.
[*]Old Bonds Become Less Attractive: Existing bonds with lower interest rates are less appealing to investors.
[*]Price Adjustment: To make older bonds more attractive, their prices must decrease.
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In essence, the value of a bond is inversely related to the interest rate available in the market. When interest rates rise, the value of existing bonds falls, and vice versa.
