Loving rising bond yields
I just don’t understand the many articles being written warning about rising bond yields. I know the danger of inflation, and how rising yields result in lower bond prices and lower total return. But if I plan to NOT EVER sell my bond mutual funds (Bonds comprise 20% of my portfolio), then shouldn’t I want higher yields. I’m retiring in 3 years and would welcome the higher income the higher yield provides. An intermediate term corporate bond fund at 1.75 % is better than any CD out there. And as the yield goes up the fund will replace old bonds with new higher paying ones. Besides, isn’t this the same concept as holding high paying dividend stocks where the dividend payout is high but the stock price is going down?
Terry Says
As long as you don’t have to sell at a loss, and as long as you have a “managed” bond fund, where portfolio managers replace older bonds with new one, and as long as the “duration” or average maturity of the bonds is less than 7 years, then rising interest rates won’t have much of an impact. But very few people understand why bond prices fall when rates rise — and so there can be shocked when they need to sell bonds or just when they look at the overall value of their portfolio. That’s why I issued the warning in a recent column.
