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.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. Floating rate loan fundsFloating 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.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.
Money-market fundsIf 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.
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..
Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities.
For more information, please visit www.flagship-capital.com.info@flagship-capital.com
Create Your Own Garage Storage Design with Storage Systems Solutions From Slide-Lok Garage Storage Cabinets. Get Organized Today in Texas, New York, and All Across the United States and Canada.
The Slide-Lok Garage Storage Cabinet Dealer Network, continues to expand in New York and Texas as well as across the U.S. and Canada.
"This is a direct result of increased sales," says President, Gary Smith, "and, since we make house calls, expansion is necessary to insure the perfect storage system for your home regardless of the configuration of your garage."
Smith asks the question, "Where do you put all the stuff that accumulates in the garage?"
"We have designed so many garage storage solutions that we remember to ask the questions that custom garage cabinet makers forget to ask.
This means the Slide-Lok Garage Storage Cabinet Systems that we design include all the things that the custom cabinets guys forget to include.""And what do the custom cabinets guys forget?"Clean Up Your Garage First - This means decide what you want to keep, and keep only what you use.
That which you do not use is just taking up space.Develope a Plan or Garage...
Ladders > Create Your Own Garage Storage Design with Storage Systems Solutions From Slide-Lok Garage Storage Cabinets. Get Organized Today in Texas, New York, and All Across the United States and Canada.
The Art Of Gutter Cleaning
Many homeowners clean their own gutters or hire someone each season to properly maintain their homes. What you may not realize is that most gutter systems should be cleaned 3-4 times a year with each season. You may be wondering why should I clean out my gutters so often? The reason is each season trees go through various cycles that can clog up your gutters. In spring, most trees drop seedlings and dead twigs. Spring is also the best time to inspect your gutters for any damages that may have occurred during the winter snow.
In summer, trees lose leaves from heavy storms and high winds. In early fall, you should remove leaves that have fallen early to keep your gutters flowing freely. At the end of fall or early winter, you want to make sure everything has been properly cleared from the gutter system to help prevent ice dams or buildup of ice in your gutters. The extra weight of frozen water in your gutters can easily cause them to pull away from the fascia and in many cases,...
The Art Of Gutter Cleaning
Ladders > The Art Of Gutter Cleaning
The Fisherman Sweater
The Fisherman Sweater Fisherman sweaters used to be something that were seen as items of warm and rugged work wear, but much as changed, and fisherman sweaters have followed jeans to make that transformation from work wear to a 20th century fashionable clothing item.Fisherman Sweater HistoryRooted in our common heritage, commercial fishermen, weekend sailors, farmers and in fact people from all walks of life love the fisherman sweater. At sea, and in town, it is a symbol of simpler times when you could look good in something that was designed just to be practical and keep you warm, not to show off a label in order to be some kind of status symbol like many garments manufactured today.The fisherman sweater has its origins in Brittany. Surprisingly it was not the fishermen that started to wear them, but merchants who during the 18th century travelled to England to sell onions, these merchants wore an item of knitted wool clothing that made them recognizable from a distance, the garments...
The Fisherman Sweater
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Escaping "Paid Slavery"
February 3, 2003 I remember that day well. I even celebrate it every year. That was the day I finally decided to make my escape from the Rat Race. For Ten years I lugged Welding Equipment up and down Train Car Ladders, doing the repair work on them so the company could make a fortune in their shipping business. Corporate downsizing required me to work 12 hours a day 6 to 7 days a week to fill the void of layed off workers.
And any complaining I did was met with the same response: "You should be lucky you even have a job". But the pain in my legs and back were telling me something different. It was telling me to GET OUT, NOW!
So I did (God Forbid we should listen to our own Instincts) But every ending is a new beginning. Thus started my two years of Internet Marketing Purgatory. Buying every product promising me financial freedom.
Throwing failed project after failed project out there on the internet while I paced the floor at 4:00 A.M. wondering how I was going...
Escaping "Paid Slavery"
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The risk from working at Heights
In 2004/ 2005 53 people died in the UK and nearly 3,800 were seriously injured as a result of a result of a workplace fall. Falls are the most common cause of death at work.
If you work at height for any task then your employer has a duty under the Working at Height regulations which places a duty of care on employers to protect their employees safety at all times who may be at risk of personal injury from a fall from height.
Latest projects launched by the Health and Safety Executive highlight the risk to the health of workers who conduct duties whilst at height but do insist that this does not mean a ban on the use of ladders as previously reported in the media.
The working at height regulations do not outright the ban in the use of stepladders but place emphasis to employers that they must carry out a suitable and sufficient assessment of risks connected with the working duties. This also entails finding reasonable alternatives if possible...
Ladders > The risk from working at Heights
LESSON FROM HUNDRED ACRE WOOD
Copyright 2004 by . All rights reserved.LESSON FROM HUNDRED ACRE WOOD-- Or, wabbit hunting is for wimps --Some say that the world is being overrun by far too many rabbits -- Oswald the Rabbit, Roger the Rabbit, Bugs Bunny not to mention all manner of wretched little Easter Bunnies. If that's so, then "wabbit hunting" is sure to become a growth opportunity for outfitters, guides, and taxidermists or for those catering to the Saturday morning cartoon-rerun crowd.On the other hand, some suggest that it requires neither courage nor skill to outwit a bouncy, four-legged, floppy-eared thing with a twitchy pink nose. They hold the popular view that the only reason these critters exist is to keep wimpy warriors safe if not sound and give the wicked wenches something to cook besides tasteless toads.Those with the "right stuff" know that the "real action" in life comes from slaying dragons, mashing monsters or trouncing trolls. For a change of pace, there's always the chance of saving the odd...
LESSON FROM HUNDRED ACRE WOOD
Ladders > LESSON FROM HUNDRED ACRE WOOD
Latter-day Saints Mobilize 4000 Volunteers in Chainsaw Brigade?s First Wave
Atlanta, Ga (ContentDesk) September 17, 2005 --
"We have not had such help since we were liberated by the Americans after World War II."
So concluded a retired Hungarian couple finally able to enjoy a respite from the overwhelming task of digging out from the aftermath of Hurricane Katrina.
They had been trying for some time to chop up the seven uprooted trees that littered their yard, using a Boy Scout hatchet, when volunteers from The Church of Jesus Christ of Latter-day Saints, moving through the area with ladders and chainsaws, stopped and offered help.
Within a couple of hours, the yard was cleared of debris.
In a weekend that saw a massive mobilization of Latter-day Saint volunteers from throughout the Southeast, the Georgia crew of five was part of a force of 4000 who took the buzz of chainsaws to hurricane-stricken areas throughout Louisiana and Mississippi.
Setting aside their weekday routines as bankers, accountants, contractors,...
Ladders > Latter-day Saints Mobilize 4000 Volunteers in Chainsaw Brigade?s First Wave
5 Ways To Protect Your Bond Portfolio From Rising Interest Rates
5 Ways To Protect Your Bond Portfolio From Rising Interest Rates Ladders suv
5 Ways To Protect Your Bond Portfolio From Rising Interest Rates Ladders suv
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