What Should I Consider for My Bond Funds if Interest Rates Rise?

A question I seem to be getting lately is how I can hedge my bond investments against a rise in interest rates.  For most investors, a diversified portfolio will hold either individual bonds or more often than not, bond mutual funds.  Where the dilemma exists is that in general when interest rates rise the current value of bonds goes down.  Now for those investors who hold individual bonds, as long as the bonds are held to their respective maturities the loss of value will be on paper only.  But what happens in a bond fund where there are many different bonds with different maturities?  Let’s take a look at what often happens:

  1. Interest rates rise. This results in currently held bond values going down.
  2. Investors panic. Investors see their relatively safe investment incur paper loss(es).
  3. Selling out. Investors sell out because they deem their investment bad – despite historical returns.

So what should you keep in mind if you feel that an interest rate hike is inevitable?  Check out the tips below to help you feel more confident about your bond investments.

  • Remember your fundamentals – Bond funds are like any other investment in that they can incur losses, either real or on paper.  Assuming you chose a bond fund to diversify your portfolio and you chose one that historically has provided you the return you seek, just because interest rates rise (which they do!) doesn’t mean that it is automatically time to sell.  Remember the fund manager is also buying new bonds at the higher yield which will benefit you over the long term.
  • Consider different sectors – Many investors look only to what are considered the safest of bond funds – government bonds.  Oftentimes by looking at high quality corporate bonds (those rated AAA) you can get a higher yield with a minimal increase in risk.  For those who are willing to accept more risk, consideration may be given to what is called “high yield” bond funds (those rated BBB or higher).
  • Think globally – It used to be that any international investment was regarded as high risk.  Not anymore!  We are truly in a global economy and what that means to you is that there is opportunity in other countries bond investments whose yield has nothing to do with what is going on here at home.  As with any international investment, no matter how stable the country is you are still taking on the different risks that you need to be comfortable with.

These are just some things to consider in reviewing your bond portfolio whenever you believe that interest rates are going to rise.  But probably the number one thing to focus on is that while on paper bond values may go down when rates rise, what happens when rates fall (that happens too)?  Bonds generally go up.  Welcome to the investing cycle of bonds.

More like this:

Mega Roth Conversions

Mega Roth Conversions

These strategies allow you to save significantly more for retirement ...
Read More
Three Ways to Skin the Asset Allocation Cat

Three Ways to Skin the Asset Allocation Cat

Choose the one that is right for you based on your objective and level of involvement ...
Read More
What Are Your Funds Really Costing You?

What Are Your Funds Really Costing You?

The lower the fees, the more of your money you get to keep and that can do nothing but help ...
Read More

Subscribe

Be the first to know when new resources are published.