5 Ways To Protect Your Bond Portfolio From Rising Interest Rates
The Federal Reserve recently raised its target federal funds rate for the first time since March 2000. This could be just the tip of the iceberg, though, as many experts believe rising inflation and a strengthening economy will spur continued rate hikes for the foreseeable future.
This is bad news for bond investors, since bonds lose value as interest rates rise. The reason stems from the fact coupon rates for most bonds are fixed when the bonds are issued. So, as rates rise and new bonds with higher coupon rates become available, investors are willing to pay less for existing bonds with lower coupon rates.
So what can you do to protect your fixed-income investments as rates rise? Well, here are five ideas to help you, and your portfolio, weather the storm.
1. Treasury Inflation Protected Securities (TIPS)
First issued by the U.S. Treasury in 1997, TIPS are bonds with a portion of their value pegged to the inflation rate. As a result, if inflation rises, so will the value of your TIPS. Since interest rates rarely move higher unless accompanied by rising inflation, TIPS can be a good hedge against higher rates. Because the Federal government issues TIPS, they carry no default risk and are easy to purchase, either through a broker or directly from the government at www.treasurydirect.gov.
TIPS are not for everyone, though. First, while inflation and interest rates often move in tandem, their correlation is not perfect. As a result, it is possible rates could rise even without inflation moving higher. Second, TIPS generally yield less than traditional Treasuries. For example, the 10-year Treasury note recently yielded 4.75 percent, while the corresponding 10-year TIPS yielded just 2.0 percent. And finally, because the principal of TIPS increases with inflation, not the coupon payments, you do not get any benefit from the inflation component of these bonds until they mature.
If you decide TIPS makes sense for you, try to hold them in a tax-sheltered account like a 401(k) or IRA. While TIPS are not subject to state or local taxes, you are required to pay annual federal taxes not only on the interest payments you receive, but also on the inflation-based principal gain, even though you receive no benefit from this gain until your bonds mature.
2. Floating rate loan funds
Floating rate loan funds are mutual funds that invest in adjustable-rate commercial loans. These are a bit like adjustable-rate mortgages, but the loans are issued to large corporations in need of short-term financing. They are unique in that the yields on these loans, also called "senior secured" or "bank" loans, adjust periodically to mirror changes in market interest rates. As rates rise, so do the coupon payments on these loans. This helps bond investors in two ways: (1) it provides them more income as rates rise, and (2) it keeps the principal value of these loans stable, so they don't suffer the same deterioration that afflicts most bond investments when rates increase.
Investors need to be careful, though. Most floating rate loans are made to below-investment-grade companies. While there are provisions in these loans to help ease the pain in case of a default, investors should still look for funds that have a broadly diversified portfolio and a good track record for avoiding troubled companies.
3. Short-term bond funds
Another option for bond investors is to shift their holdings from intermediate and long-term bond funds into short-term bond funds (those with average maturities between 1 and 3 years). While prices of short-term bond funds do fall when interest rates rise, they do not fall as fast or as far as their longer-term cousins. And historically, the decline in value of these short-term bond funds is more than offset by their yields, which gradually increase as rates climb.
4. Money-market funds
If capital preservation is your concern, money market funds are for you. A money-market fund is a special type of mutual fund that invests only in very short-term money market instruments. Since these instruments usually mature within 60 days, they are not affected by changes in market interest rates. As a result, funds that invest in them are able to maintain a stable net asset value, usually $1.00 per share, even when interest rates climb.
While money-market funds are safe, their yields are so low they hardly qualify as investments. In fact, the average seven-day yield on money-market funds is just 0.70 percent. Since the average management fee for these funds is 0.60 percent, it does not take a genius to see that putting your capital in a money-market fund is only slightly better than stashing it under your mattress. But, because the yields on money-market funds track changes in market rates with only a short lag, these funds could be yielding substantially more than 0.70 percent by the end of the year if the Federal Reserve continues to hike rates as expected.
5. Bond ladders
"Laddering" your bond portfolio simply means buying individual bonds with staggered maturities and holding them until they mature. Since you are holding these bonds for their full duration, you will be able to redeem them for face value regardless of their current market value. This strategy allows you to not only avoid the ravages of higher rates, it also allows you to use these higher rates to your advantage by reinvesting the proceeds from your maturing bonds in newly-issued bonds with higher coupon rates. Diversifying your bond portfolio among 2-year, 3-year, and 5-year Treasuries is a good start to a laddering strategy. As rates rise, you can then broaden the ladder to include longer maturity bonds.
David Twibell is President and Chief Investment Officer of Flagship Capital Management, LLC, an investment advisory firm in Colorado Springs, Colorado. Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities. For more information, please visit www.flagship-capital.com.
Stock market experts offer tips for investing amid high inflation San Francisco Chronicle
These money and investing tips can get your portfolio running again after September's breakdown - Morningstar
These money and investing tips can get your portfolio running again after September's breakdown Morningstar
ESG Investing with Carbon Credits - What Investors Need To Know CarbonCredits.com
Investing Surplus Cash During Inflation Morgan Stanley
Is the Efficient Market Hypothesis True? | Investing | U.S. News U.S News & World Report Money
Only about 30% of millennials are comfortable investing in crypto, down from about 50% in 2021: 'The shine has come off these coins' - CNBC
Only about 30% of millennials are comfortable investing in crypto, down from about 50% in 2021: 'The shine has come off these coins' CNBC
Opinion | One of the Hottest Trends in the World of Investing Is a Sham The New York Times
ESG Investing: Why investors need to add a flavour of sustainability in their portfolios - Economic Times
ESG Investing: Why investors need to add a flavour of sustainability in their portfolios Economic Times
WOW Speaker Series: Investing In Your Future Ohio Wesleyan University
Investing in Europe’s future POLITICO Europe
The Best Stocks to Invest $1,000 in Right Now The Motley Fool
Book Review: Investing In The Era Of Climate Change Seeking Alpha
How I'd Invest $250,000 Cash In Today's Bear Market Financial Samurai
What should investors focus on after a rocky quarter? It’s all about earnings: Morning Brief - Yahoo Finance
What should investors focus on after a rocky quarter? It’s all about earnings: Morning Brief Yahoo Finance
MIT Sloan research on finance and investing MIT Sloan News
The Lazy Girl's Guide to Investing in the Stock Market The Everygirl
St. Louis Inno - Investing in IT The Business Journals
Where to Invest $10,000 Right Now The Motley Fool
Stock Market Today: Dow in Worst Quarterly Streak Since 2015 as Bears in Control By Investing.com - Investing.com
Stock Market Today: Dow in Worst Quarterly Streak Since 2015 as Bears in Control By Investing.com Investing.com
What health system venture capital arms are investing in Becker's Hospital Review
Some millennials and Gen Zers are closing investing accounts over inflation. Here's why that may lead to regrets - CNBC
Some millennials and Gen Zers are closing investing accounts over inflation. Here's why that may lead to regrets CNBC
Where Is Venture Capital Investing In Bitcoin Companies? Bitcoin Magazine
Should Investors Be Worried That Micron Technology Saw a Slowdown in the Data Center Market? - The Motley Fool
Should Investors Be Worried That Micron Technology Saw a Slowdown in the Data Center Market? The Motley Fool
Investing in workforce hiring and onboarding technology Nationwide Newsroom
Watch Investing in Turbulent Times Bloomberg
3 Top Recommendations for New Investors The Motley Fool
Robinhood Investors Just Got Good News The Motley Fool
FACT SHEET: Biden-Harris Administration Announces American Rescue Plan’s Historic Investments in Community Health Workforce - The White House
FACT SHEET: Biden-Harris Administration Announces American Rescue Plan’s Historic Investments in Community Health Workforce The White House
Investing Action Plan: EV Sales, Made For Google, OPEC Decision Investor's Business Daily
7 Ways To Know You're Ready To Start Investing GOBankingRates
Got an Extra $250 a Month? Here's How to Turn It Into $500,000 The Motley Fool
If You Invested $10,000 in Realty Income at the Turn of the Century, This Is How Much You Would Have Today - The Motley Fool
If You Invested $10,000 in Realty Income at the Turn of the Century, This Is How Much You Would Have Today The Motley Fool
Two Dividend Hikes Today Worth Noting By Investing.com Investing.com
Investing in Crypto Asset Startups: Regulatory Considerations in an Ever-Evolving Market, The Review of Securities & Commodities Regulation - Morgan Lewis
Investing in Crypto Asset Startups: Regulatory Considerations in an Ever-Evolving Market, The Review of Securities & Commodities Regulation Morgan Lewis
If You Invested $1,000 in Tilray Brands 2020, This Is How Much You Would Have Today - The Motley Fool
LeBron James Among NBA Stars Investing in Major League Pickleball Sports Illustrated
The Week in Impact Investing: Reality Check ImpactAlpha
Investing in Codi Andreessen Horowitz
Scaling solutions for humanitarian impact: The Humanitarian and Resilience Investing (HRI) approach - World Economic Forum
Scaling solutions for humanitarian impact: The Humanitarian and Resilience Investing (HRI) approach World Economic Forum
“Expert” investors believe sustainable investing is most likely to drive long-term returns - Schroders
“Expert” investors believe sustainable investing is most likely to drive long-term returns Schroders
PepsiCo investing $100 million in Romanian facility Food Business News
Stocks Have Not Capitulated Yet Investing.com
Confused About Investing? Here's a Great Option to Fall Back On The Motley Fool
VC Investing Continues to Decline Institutional Investor
3 Things the Smartest Investors are Doing Right Now The Motley Fool
Explainer-How a massive options trade by a JP Morgan fund can move markets By Reuters - Investing.com
Want $2,000 in Passive Income? Invest $10,000 in These 2 Monster Energy Stocks and Wait 2 Years - The Motley Fool
Want $2,000 in Passive Income? Invest $10,000 in These 2 Monster Energy Stocks and Wait 2 Years The Motley Fool
How to Use Annual Report
There are many steps in calculating the fair value of a company. However, before we even do that, it is imperative to know how a company earns its profit.
Many people have, at one time or another, taken some of their hard-earned funds, and decided to put them in the stock market. These well-meaning individuals either acted on a tip they saw on CNBC, or actually believed one of those crazy faxes/emails that said XBXB @ $0.
Asset Allocation Lessons: The 70% Inflation Solution
For investors only..
Preparing to Invest: How to get started
Investments can be a source of great potential earnings. The two most common reasons that a person does not invest are either they do not have the money or they do not know how to get started.
Trading Commodity Futures Using Support and Resistance - Paper Trading
Setting Up a Paper Trading AccountQuestion:I cannot trade with "real money" as yet; however, how do I go about setting up a paper trade account?Answer:You can paper trade various ways and it really does not require that you have anything more specialized than a notebook to track your trades and access to charts.Begin by funding your paper trading account with the amount of money you think you will really begin with, whether it is $2000 or $20,000.
Just Say NO to Your Stock Broker
We have all heard that slogan that started back when Nancy Reagan was in Washington. It was all about drugs.
Critical Options Investing Tip When Trading Naked Calls and Puts
An option is a derivative trading product that is best used by investors as a hedging tool providing investing profit protection and profit enhancement. Although it is a powerful risk management tool, it can also be used effectively as a stand-alone trading vehicle.
Finding the Perfect Company
The perfect company - it's the holy grail of the investment world. The company that will make its initial investment hundreds of times over.
Reading Between The Lines In Annual Proxy Statements
Upper Saddle River, N.J.
Investor Guide to Financial Health
Step 1: Spend less than you earnPerhaps the simplest financial concept is the toughest for us to conquer- spend less than you earn. After paying your living expenses (bills, loan and mortgage payments, cost of food, charitable contributions, taxes, etc), you can begin to save and invest toward your future.
Invest To Make Money, Not To Get Rich
The technology boom of the '90s romanticized the "rags-to-riches" ideal that all of us dream about when investing. For those that invested $1000 in Dell at $5 during 1990, held through the seven splits, then sold in March 2000 at $59, the dream was a reality.
Focus Your Investments on the Long Term
"All human power is a compound of time and patience!"Honore de Balzac (1799 - 1850)Long term investing or "Buy and Hold" is not about hunches, emotions, stock tips, market timing or making quick profits! It's about using proven long-term strategies to accumulate wealth over time!A large part of the daily volume on the exchanges is due to traders who hope to make a small profit by taking advantage of small discrepancies in the pricing of securities, or who are able to buy a stock as soon a favorable analysts report is issued and who hope to profit before the inevitable runup.The instantaneous access to information that financial institutions have gives them an enormous advantage over the individual investor when it comes to short-term trading.
DXPortfolio: A Great Passive Investment of 25% to $40% per month
First, I need to explain about e-currencies or digital currencies. DXPortfolio are based and supported by the supply and demand of e-currency.
Get Wealthy With the Rule of 72
When it comes time to retire how many people would like tohave a nest egg that is 2 or 3 or even 4 times larger thanwhat they have? With an answer so obvious allow me toexplain how you can make it happen for yourself.First we'll explain the Rule of 72.
Five Sure Fire Way to Secure Your Financial Future
"You can be poor when you're young, but you can't be poor when you're old." That was the tag line used some years ago in a financial services television commercial.
Should You Put Your Annuity in an IRA?
Let me start by answering that question..
The Differences Betweeen the Wealthy and Everyone Else
I recently received an e-mail from a young lady who had doubts about the principles of wealth found in "Rich Dad, Poor Dad". She mentioned a couple of past failed investments, and wanted to know what I thought about investing and financial freedom - whether it was just a myth, or whether it could be acquired.
Day Traders and Swing Traders and Options? Maybe!
Typical day traders and swing traders look for stocks with quick,short term movements, and are not in the business of holdingpositions overnight let alone a week or two. So the use ofoptions has not usually been a component of their tradingstrategies.
I've been in and interested in the stock market so long (one year shy of forty years) I can remember when the mutual fund pages in my home town paper were just one page! Now it looks like there are more mutual funds then there are stocks listed on the New York stock exchange.I wonder how many billions of investor dollars are supporting these funds.
Raising Capital Using a Public Company
Going public in this manner is ideal for companies that may not be large enough to attract an underwriter for an IPO and those that don't need to raise capital immediately. They want to go public because of the many benefits that being a public company offers such as increased valuation, using public stock as currency to acquire other companies and assets, liquidity, prestige and to reduce the need for expensive venture capital and other financing sources.
|home | site map|