Bonds and Interest Rates: Making Sense of the Market in Turbulent Times

Submitted by PEBA on April 14, 2021

Bond Interest Rates

Are you invested in either the PEPP Conservative Fund or PEPP Bond Fund? Knowing these two funds have seen negative returns in recent months, we want to explain why this happens from time to time.

Both the Conservative Fund and the Bond Fund invest heavily in fixed income assets. That’s why these funds tend to appeal to members who: 1) see capital preservation as a priority and, 2) have a low tolerance for equity risk. Also, these funds typically see relatively low returns and price fluctuation.

Walking the risk tightrope

As with any investment, each PEPP investment option has some level of short-term and long-term risk associated with it, including these two funds.

The difference between the Conservative Fund and Bond Fund is the level of diversification in the asset mix. The Bond Fund is a specialty fund investing only in fixed income or bonds. While the biggest asset class for the Conservative Fund is also fixed income, it is more diversified than the Bond Fund. It also includes equities (stocks) and alternatives, such as real estate.

Therefore, while both funds may experience negative returns from time to time, negative returns can be more glaring for the Bond Fund, on occasion, because it relies on a single asset class.   

What causes bonds to drop in market value?

A bond’s market value is directly impacted by fluctuations in interest rates. So, when interest rates fall, bond prices rise and when interest rates rise, bond prices fall.

PEPP’s Bond Fund invests in a variety of fixed income assets. These diverse income asset holdings improve the Fund’s risk profile and help manage risks, including rising interest rates. Unfortunately, when a fund is either mostly or completely invested in fixed income assets, it’s going to take a negative hit when interest rates are on the rise.

What are your options?

It depends. Where are you in your career – nearing retirement or already retired? Is your personal financial portfolio well diversified or heavily weighted in one asset class? Are you looking to preserve capital or still wish to see some level of growth? One tool that may help guide you is PEPP’s Investor Profile. Other options include talking to one of PEPP’s Retirement Information Consultants at 306-787-3170 or, who are CFP® or QAFP™ professionals or your own financial planner.

We know it’s risky to put all our eggs in one basket. It’s also true that all investments hold some degree of risk. Without knowing what the future holds, it’s always best to minimize risk with a diversified portfolio – especially when we’re retired or nearing retirement. Unpredictable financial markets may cause a sharp rise or fall without notice. Yet, not all investments move up and down in value at the same time nor at the same rate so a diverse investment portfolio helps keep risk as low as possible.


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