Investing in bond funds when interest rates rise

Just a quick post here. This is interesting to me. I am commenting on what this author is talking about, and not my own research or knowledge. Their position is compelling. Cash is better than long term bonds in a rising interest rate environment. This is what the Fed is saying they will do for the next year. This is why we have cash in T-bills and I-bonds. We are not spread into precious metals, and I think that is coming. Both of these are hedges against poor bond performance.

The bigger question to me is do I pull money from my existing bond fund investments. For now, no. Still, that may change. What are you folks doing? This isn’t about timing the market, but it is about reacting to it.

My suspicion is that I will adjust down to a 60% stock 40% bond ratio as we cross 3.5% yield on bonds; perhaps 4%.  I could go as low as 50/50 if we go past 4%.  A lot will do with how close we are to are to fire when that happens of course, and how well our investments do.

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7 Comments

  1. I think selling in a taxable account (unless you want to dump risky individual stocks with big gains) and you are considering to sell s&p index fund is a Big NO because you are going to hit by capital gains (very likely) and you are truly timing the market

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    1. This us exactly my concern. My intent is to react to the changing risk conditions and rising interest rates. This situation is new for me as an investor. I will definitely take your advice and do the math to weigh the tax implications against the risk changes. In my tax free accounts, there is not that problem with rebalancing.

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      1. Exactly… in your not taxable is not an issue

        In your taxable account in my view is not only a matter of math but of emotions (e.g. sell when you think market is going down and viceversa)

        Remember that trying to time the market is the best recipe for disaster

        Just set an allocation target based on how far is your retirement date (early or standard) and stick on it with two exceptions:

        1) if you are investing in 100% in equity (only option in a practically zero total market low cost index fund ) in this raising interest rate you might try to reduce to 90% and invest the rest in CD or T-bill

        2) if you have individual stocks (btw avoid to invest in them more than 2-3% of your total net) very likely the moment to sell them is not (likely you get good gains, you reduce risk to your portfolio)

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      2. We have been high risk for a while, and I have been thinking of shifting down, via either new contributions or rebalancing for a while. The former is a bit slower, especially now that our savings is higher.

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      3. Reducing equity exposure is every investors dilemma right now (well…I would say for the past 3 years)
        Just watch out how you rebalance, minimize tax hits and remove emotions from the process…

        Liked by 1 person

  2. I’m beginning to move some of my after-tax investments into shorter-duration bonds. These are less-sensitive to interest rate changes and provide more certainty than stocks for holding cash. We’re planning to buy a house in the next 2-3 years and want the capital to be available when we need it.

    Regarding my forecast for interest rates, I suspect they continue their march higher and have long-dated bonds suffer. I don’t want to put a number to my forecast but I wouldn’t be surprised with a 3.5% number on the 10-year in the next 6 months and perhaps 4% in the next 12-18 months. I don’t see rates going too much above 4-4.5% before a recession ensues, personally.

    If they do, I’ll be buying some long-term bonds. I’ll lock in a higher interest rate and also benefit in terms of total return (income return and price return components on bonds) from falling rates when they begin their journey back down. I can’t imagine the economy humming along by that point and the Fed choosing to leave rates alone or continue increasing them.

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    1. Your view is about where I am at. The big difference for us is that we have the house.

      One area I am considering is municipal bonds. I haven’t purchased any yet, but I am seriously considering it.

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