When clients see changes in their statements or hear about major economic headlines, they want answers from you. As their advisor, you want to help.
With an entire financial media ecosystem dedicated to debating what the Fed might do at its next meeting, it’s understandable that clients feel concerned.
You do not need to know the Fed’s next move to have a productive conversation about bonds. In fact, trying to predict it distracts from the questions that matter more.
The Federal Reserve raised its target range for the federal funds rate by 25 basis points in September, bringing it to 3.75%–4.00%. Importantly, and what may be causing such a stir, is the fact that this was the first rate increase since 2023.
With rising interest rates and bond price fluctuations dominating the conversation once again, how should advisors approach the topic with clients? Here’s how to have a productive discussion, without speculating on what might happen next.
First, Talk Through What Happened in September
Before getting into the technical impact of the Fed’s recent move, start by acknowledging why clients are concerned. In September, interest rates rose.
At the same time, bond values are dropping. Clients could see this as a sign that something in their portfolio has gone awry.
This is a chance to provide context without bogging clients down in the details.
Bond prices and interest rates generally move in opposite directions. When rates rise, newly issued bonds can offer higher yields. That makes older bonds paying lower rates less attractive, pushing their prices down. This may be what clients see reflected on their statements.
There is a potential upside, too. When prices fall, yields and future return potential improve. Higher rates create better income opportunities for new money and for the proceeds from bonds that mature or pay interest. Selling bonds after a decline risks missing that healthier environment.
Rising rates might create some short-term discomfort for clients. They also improve the income potential available to fixed-income investors.
What Matters More than the Next Fed Move?
Nobody can reliably forecast interest rates. Fed policy, inflation, government deficits, demand for Treasuries, economic growth, and market expectations all push on yields at once, and even experts disagree about which one is driving rates at any given moment.
Fortunately, a sound bond strategy can be built around three questions you can answer today, no forecast required.
Is the client being paid enough to lock up money longer?
Longer-term bonds usually pay more, but their prices also swing more when rates move. The extra yield is only worth it if it fairly compensates for that added risk. When longer bonds offer meaningfully more income, extending can make sense. When short- and long-term bonds pay about the same, there’s little reason to stretch.
Is the client being paid enough to take on credit risk?
Lower-quality borrowers pay more to borrow. Sometimes that extra income is generous. Other times, investors take on noticeably more risk for very little additional yield. The question is whether the reward justifies the risk for this particular client and how it fits within their broader fixed-income strategy.
When will the client need the money?
Time horizon and purpose often matter more than anything happening at the Fed.. Money set aside for next year’s spending should be invested differently from money that won’t be touched for a decade.
How to Answer When Clients Ask “Are Bonds Stable?”
Investors tend to associate bonds with safety. When they see a bond fund decline, they wonder what happened and where things went wrong.
Use this opportunity to remind investors that bonds carry risks and that bond rates will fluctuate. For example, bonds are prone to interest-rate risk and credit risk. Fixed-income investments behave differently depending on their maturity, credit quality, structure, and the broader market environment.
That said, fixed income still belongs in a client’s portfolio. You may just need to remind them why.
Bonds help to:
- Dampen portfolio volatility
- Produce income
- Provide diversification
- Fund known or anticipated spending needs
Script for Advisors
When clients call with concerns, they aren’t looking for an economics lesson. They want to know what’s happening, how it’s going to impact them, and what action (if any) they should be considering.
Here are a few sample talking points for approaching the topic, without becoming speculative:
“ When rates rise, the prices of existing bonds fall. This likely explains some of what you’re seeing in your account right now.”
“New bonds are paying higher yields, which creates opportunities to earn more income as we invest new money or reinvest proceeds from bonds in your portfolio.”
“As for what the Fed does next, we do not need to make that prediction in order for your bond strategy to work. We are looking at what different bonds are paying today, how much additional income we can earn for taking on additional risk, and when you will want to access the money. Those are the things we can evaluate today, and they are more important to your plan than trying to guess the Fed’s next move.”
While each conversation will vary, the underlying message should remain the same. Explain what happened, put the impact in context, and bring the conversation back to the factors you can evaluate and control together.
Help Clients Keep Calm and Focused
Even the Federal Open Market Committee can’t reliably predict what it’ll do next. If the ones making the decision can’t reliably say either way, no advisor should speculate either.
Not having all the answers can be frustrating for clients. Use this uncertainty as a learning opportunity to help them see, in real time, the difference between what can be controlled and what can’t. A plan built around time horizon and purpose gives clients steadier footing than a correct guess about the Fed’s next move.