Articles About Finance And Refinancing

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.

Other Article Sites

findabook.com  moneycd.info  a-mortgage.info   about-lemon-laws.info  aboutstudentloans.info
all-about-publishing.info  auctions-articles.info  bestcollege-university.com  bestispconnection.com
biblefolder.com  blogger-website.com  books-used.info  brokers-guide.info  buywindows.info  cable-dsl.info
career-miner.com  carpel-tunnel.info  cashinaflash.info  cashloanreviews.info  casinobell.com  chat-house.info
clearmycredit.info  collegeloantips.info  crones.info  depression-articles.info   dirnic.net  dishguides.info
divers-below.com  expodog.info   financewizz.com  fire-insurance.info  getgood.info  handleit.net   it-idea.info
health-supplies.info  hosting-right.com  insidealert.com  insurance-facts.info  jobs-employment.info
justgood.info  lookgold.net   lowcost-travel.info  money-source.info  myhostzone.info  numisblog.com
peoplesearchfinder.info  pr-articles.info  realeas.com   refinancing-guides.info  spyware-remove.info
telelot.info  the-law.info   toppaid.info  travel-deals.info  travelcorrect.com  wedding-guide-site.com
your-blog.info  your-credit.info

MORE ARTICLES:

Mortgage Tips For Nervous Buyers.
HERE'S A BIG TIP: ALWAYS NEGOTIATE. The first quote you're offered is not the bottom line. It's easier to get a better deal from one lender if you've been offered a good one previously by another. You can use this as ammunition when speaking to the loan officer.

Understanding the Catch-22 of a Student Credit Card
It will come as no secret to most people that if you have bad credit, it will make it tougher for you to get a new credit card account approved, simply because you are seen as a higher credit risk, and perhaps higher than a particular lender is willing to see for his customer base.

Financing Survey Results Show Certain Groups More Likely to Finance Home Improvement Projects
While the majority of homeowners still choose to pay for home improvements with funds from checking and savings accounts, financing is still a prevalent option.

Mortgage Default Assistance Announces More Loan Modifications to Stop Foreclosure
Mortgage Default Assistance works for homeowners who are determined to stop foreclosure on their homes, by working out a plan with the different parties involved, such as the lender and attorneys.

Home Mortgage Loan ? What Are The Preparations You Should Know
Obtaining a home mortgage loan involves a few simple preparatory steps whether this is your first home or whether you are experienced in real estate investment Plan ahead and the loan process will go much more smoothly

Thinking Of Co-Signing For A Loan? Read This First
It is quite common for someone, who is having trouble getting credit, to approach a friend or relative to act as a guarantor or co-signatory for a loan. They've seen that new car they would dearly love, but have one problem.

New Home Loan - Understand The Various Types Of Mortgage Lenders
So, you've decided to buy a house, and you're ready for that all important next step—applying for a mortgage loan. But where should you go? After all, the mortgage business is complex, and you've realized quickly that your choices for lenders are immense.

How To Use Credit Card Debt Consolidation To Get Out Of Financial Trouble
Most people have credit cards, it is a fact of life, and is in fact almost a requirement to function in today's world. But at the same time, many people view credit cards as "free money", and instead of differentiating carefully between "want" and "need" when they are considering purchasing something, that line starts to get very hazy and unclear. Frequently an item that really belongs in the "want" category is moved to the "need" category by the various forms of mental justification (like "I deserve this") that people play on themselves.

Accretive Commerce Selects CyberSource as its Global Payment Processor: CyberSource and Accretive Commerce form Strategic Alliance to Enable M
Accretive Commerce, the leading business process outsourcer of direct-to-customer commerce services, announced today they have formed a strategic alliance with CyberSource Corporation (NASDAQ: CYBS), a leading provider of electronic payment and risk management solutions, to offer CyberSource's payment management services to Accretive Commerce's clients.

Why Use Low Interest Rate Credit Cards?
Before considering applying for a low interest rate credit card you should be aware that it is necessary to have a good credit history before you will qualify. You can get your credit report for free you can find out in advance where your credit history stands. This way you will know if it needs any type of repair before you apply for a low interest rate credit card.

Personal Debt Consolidation Loan Stretches Your Budget While Unemployed
If you are juggling multiple credit cards and possibly other debts as well, anything that lowers your income, such as losing your job or making less in commissions, will affect your ability to make your payments. The short term solution may be to increase your disposable income by reducing your expenses. An effective and financially beneficial way to reduce your debt repayments is to consolidate them into one personal debt consolidation loan.

Discount Mortgage Company Supports New Closing Cost Program
AAXA Discount Mortgage, a leading discount mortgage company, has agreed to promote Century21's closing cost credit program.

PCLender Names Mortgage Veteran Tom Corvo VP Business Development : Wholesale lending expert equates SaaS enterprise platform with improved profitab
PCLender.com, a fully hosted web based software and services solutions provider to mid-sized mortgage bankers and financial institutions, has named mortgage banking veteran Tom Corvo vice president for business development. Corvo, whose mortgage career spans 18 years, was an early adopter of the PCLender.com InHouse Mortgage enterprise lending platform as it was developed and launched in the mid 1990s.

Picking the Right Loan is Vital for Temecula and Murrieta CA Real Estate
There is no doubt that we are in a buyer?s market. We have seen home prices drop about 10-15% over the last year and a half. The reason for much of this downtrend throughout the US is a significant oversupply of homes for sale currently on the market. And the reason for all these home offerings in many cases is directly due to the loan program the sellers either chose at purchase or via refinance.