Evaluate and Manage Your Interest Rate Risk

Evaluate and Manage Your Interest Rate Risk

Have concerns? Prepare now for future interest rate changes. This extended period of low interest rates has helped to push bond prices and values to relatively high levels over the past several years. If you are concerned about the potential for rising rates, now may be a good time to assess your bond fund holdings.

Understanding Interest Rate Risk

The threat of lower bond prices due to rising interest rates is called "interest rate risk." This risk cannot be eliminated, but it can be managed. Consider:

  • Diversifying your bond fund portfolio with funds that hold higher-yielding securities that are typically less interest rate-sensitive than Treasuries, such as corporate bonds or mortgage-backed securities.
  • Focusing on shorter-duration funds for less volatility, or money market funds for capital preservation.

What's Your Fund's Duration?

Duration, expressed in years, is a key measure of a bond fund's sensitivity to interest rate changes. Because interest rates and bond values move in opposite directions, bond fund investors generally want durations to be:

  • Longer when interest rates fall (to capture bond price increases)
  • Shorter when interest rates rise (to reduce bond fund declines)

When reviewing your holdings, a good rule of thumb is to use your bond fund's duration as your guide. The longer the duration, the more a fund's value will rise or fall with changes in market interest rates.

The table below shows the current duration of American Century Investments® bond funds. If you feel like the duration of your bond fund or your portfolio are not aligned with your investing time frame, call us and we can help you evaluate your situation.

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1

Fund shares are not guaranteed by the U.S. Government.

2

The lower rated securities in which the fund invests are subject to greater credit risk, default risk and liquidity risk.

3

International investing involves special risks, such as political instability and currency fluctuations.

4

Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax.

5

The prospectus contains very important information about the characteristics of the underlying securities and potential tax implications of owning these funds.

6

Although you can potentially earn a dependable return if you hold your shares to maturity, you should be prepared for dramatic price fluctuations which may result in significant gains or losses if sold prior to maturity.

7,8

Because the fund invests primarily in California municipal securities and securities issued by U.S. territories, its yield and share price will be affected by political and economic developments within the state and territories.

There is no guarantee that all of the fund's income will be exempt from federal or state or local income taxes. The portfolio managers are permitted to invest up to 20% of the fund's assets in debt securities with interest payments that are subject to federal income tax, California state or local income tax and/or the federal alternative minimum tax.

9

Investment returns are exempt from Federal taxes.

10

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

While knowing the duration of your portfolio is good, you should compare it to when you need your investment dollars. The nearer your goal, and/or the more sensitive you are to potential changes in the value of your portfolio, the shorter your duration should be.

If your goal time frame is shorter than your fund's duration

Consider shortening the duration of your portfolio. We offer:

If your goal time frame is longer than your fund's duration

You may not need to make adjustments to your portfolio today.

However, if your goals are more long-term, we believe intermediate-term, core diversified fixed income holdings may be a better option. We offer several funds with a longer duration. You may want to consider:

We offer a complete product line of fixed income funds that can help you match the duration of your portfolio to your timeline.

American Century Investments® fundamentally believes the best way to prepare for all market conditions is to have a fully diversified portfolio. Learn more about our line-up of asset allocation portfolios that provide instant diversification in a single fund.

Our fixed income experts believe that interest rates should remain contained this year; however, we are clearly closer to the end of this low-rate cycle than to the beginning. We recommend that the duration of your portfolio be matched to your investment goals and your tolerance for volatility.

Recommended Resources

Investment Outlook

Insights

Bond Basics

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This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Duration, which is an indication of the relative sensitivity of a security's market value to changes in interest rates, is based upon the aggregate of the present value of all principal and interest payments to be received, discounted at the current market rate of interest and expressed in years. The longer the weighted average duration of the fund's portfolio, the more sensitive its market value is to interest rate fluctuations. Duration is different from maturity in that it attempts to measure the interest rate sensitivity of a security, as opposed to its expected final maturity.

Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

Diversification does not assure a profit nor does it protect against loss of principal.