view transcript

Marc Pfeffer: 00:04 In terms of how bonds work - essentially there's a, what we call an inverse relationship between the price of a bond and the yield of a bond, meaning that the price of the bond, a price of the bond will go down. If interest rates move up, meaning that you have to give, you have to in order to earn a higher rate of interest, the price of that bond that you are willing to pay is going to be lower and vice versa. So that's the really the way it would work. And the other way I would explain it as this, so example, if you're looking at certain investments about what are you willing to do? So we tell somebody, so let's just go, if you're going to the bank and you're looking at CDs right now, I can go buy a six month CD yielding two and a quarter percent.

00:45 Now we know that the Federal Reserve is expected to lower interest rates at some point, maybe once or twice over the next six months. And you can lock up right now, a three year CD at 2% so what's one to do? Well, you, you may want to just lock up, if you want to call it the 2% rate for the three years, because you know, in the next six months, if interest rates are gonna go down, you won't be able to get that 2% yield or even close to it, perhaps over the next two and a half years after the six months CD matures.

Marc Pfeffer is the Chief Investment Strategist at CLS Investments and he manages bond portfolios. 

The even better news? He breaks down just how bonds work and how they fit into a portfolio, especially for those investors who don't want to take much risk (stocks have flown high this year and could soon fall). 

"In terms of how bonds work, essentially, there is what we call an inverse relationship between the price of a bond and the yield of a bond, meaning that the price of a bond will go down if interest rates move up," Pfeffer said. "In order to earn a higher rate of interest, the price of that bond that you're willing to pay is going to be lower and vice versa."

Of course, if interest rates move down, which may very well happen soon, bond prices will move up (they already have because markets try to anticipate changes before they happen). 

Watch the video above to learn more about how bonds work.

What Stocks and Sectors Investors Should Watch During the Second Half of 2019