Investments

Is this a good time to invest in TRowe Price Floating Rate fund (PRFRX) or similar funds? Also should I sell intermediate bond funds and buy short term bond funds as treasury yields seem to be heading higher now (Jun-Jul 2013). I’m mainly investing for income. Am retired and in my 60’s. Thanks.

SAVAGE SAYS: Well, that is the zillion dollar question! The global bond market for the nearly $16 trillion of U.S. debt obligations places “bets” on that question every day. If we knew for sure that interest rates had bottomed out, we would all sit in short-term Treasury bills waiting to buy bonds when yields move higher and we can lock in higher returns!

As a reminder, when interest rates move higher, bond prices drop. So if you wait to sell, you could lose principal value of your find, simply because rates have moved higher. The longer the maturities of the bonds in the fund, the larger the incremental price drop for every increase in interest rates, which are set by the market.

Since we will never know for sure — although I have a strong bias to believing that rates must move higher because of all this Fed money creation — the best route is to diversify along the maturity line. Own some money market, some intermediate bond funds — but nothing longer than 10 years. Staggering maturities means you will always have some investments maturing, and can take advantage of higher rates if they arrive. But in the meantime, you sacrifice some current income to get this liquidity. Well managed funds can do this juggling act for you — but remember, an intermediate fund must stick to only certain maturities, weighting them either shorter or longer term, but within the definition of their category.

The real question, if you are retired in your 60s, is whether you can afford to play this interest rate game — or whether you should still be trying to bring in additional income from work.