When interest rates move higher, bond prices drop to compensate. For example, two months ago, you could have purchased a $1,000, 10-year U.S. Treasury bond with a fixed rate of 3.12 percent. But now the market rates on 10-year Treasury bonds have moved to nearly 3.75 percent, as the Treasury is announcing huge new bond sales to finance the deficit. So the current market value of your 3.12 percent, $1,000 bond has dropped to $940 -- if you try to sell it.
Here's the rule: When interest rates rise, bond prices fall.
Of course, you could hold the bonds to maturity in 10 years, but in the meantime, you'd be earning less interest. And the $1,000 you get back at maturity would have less buying power. In the interim, prices have fallen -- and so has the share price of your bond fund. That's how you can lose money in even top-rated bonds or bond funds.
The longer the "maturity" -- the future repayment date -- of the bond, the greater the drop in market value as interest rates rise. That's why you should stick to short-term bonds, two years or less, if you fear a return of inflation. That way, you'll get a chance to reinvest sooner, at higher rates.
If you own a single bond, or several bonds, or a bond fund, the principle is the same: When interest rates rise, the value of your bonds falls. When you get your monthly retirement plan statement, your bond fund could show a loss -- just as your stock fund did when the stock market took a hit.
The only real place to "hide" from volatility in a retirement account is a money market fund or a "stable value" fund. Otherwise, you might just be jumping out of the equity frying pan into the bond fire! And that's The Savage Truth!