Investors Don’t Realize Interest Rates’ Effect on Bonds

Published July 02, 2004, 1:00 a.m. EDT

Updated July 02, 2004, 1:00 a.m. EDT

1 Min Read

Investors do not understand the significant blow bond values take when interest rates are raised, a recent survey shows.

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A Harris Interactive survey sponsored by ProFunds Advisors shows 68% of investors do not understand how negative rising interest rates are for bonds. The agencys third annual survey did not present much more new information than its second, conducted in May 2003, which showed that 65% of investors understood the correlation.

Almost 75% of investors do think rates will rise over the next two years, as do most experts. Last year, only 57% thought that would happen.

ProFunds Chairman and CEO Michael L. Sapir said the survey results showed that many investors have the wrong ideas about bonds. "Many investors still think of bond investments as safe havens. But if we are entering an extended period of rising interest rates, as many investment professionals believe, investors could be in for an unpleasant surprise," Sapir said.

Wednesday, the Federal Reserve raised its key interest rate a quarter of a point, representing the first time in four years that it went up. It marked the end of an unprecedented period of low rates, and although the Fed has said the rate would not rise as quickly as it usually does, it is expected to gradually hike it up.