Having experienced high interest rates in the 1980’s I wouldn’t lock in anything long term at 5% or less. Until then I have a T-Bill step stool (not ladder). 4 tranches of 1-month T-Bills that mature each week. Until budget deficits addressed inflation not getting to 2%.
nothing be happy with a mutual fund that returns 8% with no mess……you are beating inflation and ahead of the game…….chasing rates will make you poorer in the long-run
I hold 15% of my fixed income in four- and eight-week T-Bills. The remainder is in an intermediate-term treasury index fund. I think the large allocation to cash equivalents in this higher yield environment isn’t terrible and will give me some protection if interest rates go higher. Cash does reasonably well in a rising interest rate environment. And rates may indeed rise. The future is absolutely unknowable.
It looks like the Fed will cut — but that doesn’t mean longer term rates will come down very far (if at all). I’ve been happy in CDs, short-term Treasurys held to maturity and I Bonds — there’s no risk of lost principal if interest rates were to rise. The only bond funds I own are light on Treasurys and heavy on mortgage securities and high yield, so they are a little less interest sensitive than the bond index funds, which are heavier in Treasurys. I’ll sell one of my I Bonds soon because the fixed rate is low, but may buy back in if new issues have a higher fixed rate. Also, there are US Treasury floating rate funds you can buy where the interest will quickly go up in case short rates head higher again.
I thought the trend is down; three cuts by year’s end? If this question is purely hypothetical, conventional wisdom is to sell interest-sensitive securities (utilities, banks, long term bonds, et al) and ride the wave up in money market and floating rate funds, and online bank accounts.
Personal Opinion, but these comments are 10 months to 2 years old. Bond funds seem to change more like stocks these days. If you want stability, buy iBonds or Treasuries and the like. Be careful of Bond funds at times like these.
The intrinsic value of a bond (or bond fund) is a simple proposition, and the interim impact of rate increases can obscure that fact at times.
Take, as an example, the Vanguard Intermediate Term Corpororate Bond Index Fund (VICSX). It’s Average Coupon is 3.4%, and its Average Effective Maturity is 7.6 years. So, the fund will receive an average of $34 of annual income per bond held for an average of 7.6 years, and then receive its $1,000 of principal per bond. That’s the intrinsic value of the fund.
The market pricing effects, however, can be seen in the Average Yield to Maturity (4.3%), and the Duration (6.4 years, suggesting a 6.4% price movement on a 1% move in interest rates). The share price has also dropped from about $26 to $22 since the bottoming of rates in 2021. These are the pricing impacts of the current, rising rate environment.
However, assuming that the bond manager doesn’t torpedo a fund with bad trading (presumably, less likely to happen in an index fund), the investor should receive the intrinsic value of the investment over time, regardless of market pricing movements.
The inverse relationship between interest rates and bond prices is relevant with regard the current pricing of the bonds, and the Capital Gains or Losses that would result for sales before their maturity dates, but the intrinsic returns are essentially assured, if the bonds are held to maturity, and presuming no major credit defaults.
All of which is to say that I’m not locking in losses by selling my existing bond fund holdings that may have lost money on paper at the moment (and I hope the bond fun managers aren’t as well).
Of course bond prices fall when rates rise, all else equal, but with a bond fund, new higher-yielding holdings slowly replace lower-yielding maturing bonds.
Wouldn’t it be great to have an environment 10+ years down the line when you can invest in an aggregate bond fund and earn a positive real yield of perhaps 2-3% like the good ole days? If you periodically invest in bonds now, maybe you will stand to benefit in that scenario.
Coming back down to the reality of today, bond investors have to step out on the risk spectrum in search of decent yields. Emerging market bonds, US high yield debt, floating-rate bonds–all are popular options.
You can also invest in Series I bonds or even Series EE bonds that have virtually no risk.
High dividend stocks and closed-end funds (which use leverage to really juice the yield) may seem like decent options, but a year’s worth of dividends can be wiped away after a couple days’ trading.
Having experienced high interest rates in the 1980’s I wouldn’t lock in anything long term at 5% or less. Until then I have a T-Bill step stool (not ladder). 4 tranches of 1-month T-Bills that mature each week. Until budget deficits addressed inflation not getting to 2%.
nothing be happy with a mutual fund that returns 8% with no mess……you are beating inflation and ahead of the game…….chasing rates will make you poorer in the long-run
I hold 15% of my fixed income in four- and eight-week T-Bills. The remainder is in an intermediate-term treasury index fund. I think the large allocation to cash equivalents in this higher yield environment isn’t terrible and will give me some protection if interest rates go higher. Cash does reasonably well in a rising interest rate environment. And rates may indeed rise. The future is absolutely unknowable.
It looks like the Fed will cut — but that doesn’t mean longer term rates will come down very far (if at all). I’ve been happy in CDs, short-term Treasurys held to maturity and I Bonds — there’s no risk of lost principal if interest rates were to rise. The only bond funds I own are light on Treasurys and heavy on mortgage securities and high yield, so they are a little less interest sensitive than the bond index funds, which are heavier in Treasurys. I’ll sell one of my I Bonds soon because the fixed rate is low, but may buy back in if new issues have a higher fixed rate. Also, there are US Treasury floating rate funds you can buy where the interest will quickly go up in case short rates head higher again.
I thought the trend is down; three cuts by year’s end? If this question is purely hypothetical, conventional wisdom is to sell interest-sensitive securities (utilities, banks, long term bonds, et al) and ride the wave up in money market and floating rate funds, and online bank accounts.
Personal Opinion, but these comments are 10 months to 2 years old. Bond funds seem to change more like stocks these days. If you want stability, buy iBonds or Treasuries and the like. Be careful of Bond funds at times like these.
The intrinsic value of a bond (or bond fund) is a simple proposition, and the interim impact of rate increases can obscure that fact at times.
Take, as an example, the Vanguard Intermediate Term Corpororate Bond Index Fund (VICSX). It’s Average Coupon is 3.4%, and its Average Effective Maturity is 7.6 years. So, the fund will receive an average of $34 of annual income per bond held for an average of 7.6 years, and then receive its $1,000 of principal per bond. That’s the intrinsic value of the fund.
The market pricing effects, however, can be seen in the Average Yield to Maturity (4.3%), and the Duration (6.4 years, suggesting a 6.4% price movement on a 1% move in interest rates). The share price has also dropped from about $26 to $22 since the bottoming of rates in 2021. These are the pricing impacts of the current, rising rate environment.
However, assuming that the bond manager doesn’t torpedo a fund with bad trading (presumably, less likely to happen in an index fund), the investor should receive the intrinsic value of the investment over time, regardless of market pricing movements.
The inverse relationship between interest rates and bond prices is relevant with regard the current pricing of the bonds, and the Capital Gains or Losses that would result for sales before their maturity dates, but the intrinsic returns are essentially assured, if the bonds are held to maturity, and presuming no major credit defaults.
All of which is to say that I’m not locking in losses by selling my existing bond fund holdings that may have lost money on paper at the moment (and I hope the bond fun managers aren’t as well).
Stay in equities and cash
Buy more I-series savings bond on Treasurydirect.gov (currently, Q1 2022, paying 7.12%!) 😉
Fixed-income investors should be excited!
Didn’t expect to read that, did you?
Of course bond prices fall when rates rise, all else equal, but with a bond fund, new higher-yielding holdings slowly replace lower-yielding maturing bonds.
Wouldn’t it be great to have an environment 10+ years down the line when you can invest in an aggregate bond fund and earn a positive real yield of perhaps 2-3% like the good ole days? If you periodically invest in bonds now, maybe you will stand to benefit in that scenario.
Coming back down to the reality of today, bond investors have to step out on the risk spectrum in search of decent yields. Emerging market bonds, US high yield debt, floating-rate bonds–all are popular options.
You can also invest in Series I bonds or even Series EE bonds that have virtually no risk.
High dividend stocks and closed-end funds (which use leverage to really juice the yield) may seem like decent options, but a year’s worth of dividends can be wiped away after a couple days’ trading.