Berk Sure Has A Way

Putting my mouth where my money is.

Sell your bond fund!

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More precisely, sell all your long term bond funds (10-30 years).  They can and will lose value.  Since bond prices move in the opposite direction to interest rates, when interest rates rise, you will lose money.  And unlike an actual bond, you can’t get your original investment out because funds don’t have an end date.  Luckily, if you sell now (with the 10 year rate at 4%) you did quite well.

 

Long term interest rates are going higher.  Too many forces working to push them up:

  • Fed will raise rates at a measured pace for rest of year – this will shift demand from long to shorter duration bonds
  • Budget deficits at record levels with no end in sight
  • The likely return of the 30 year long bond
  • The eventual halting of Asian central bank purchases (god forbid they sell!)
  • The dollar will weaken against Asian currencies sparking a sell off of bonds   
  • Inflation looks like it will be coming back (maybe…)

OK, so interest rates rising.  What to do?

  • Sell your long term bond funds or ETFs (and junk bond funds too!)
  • Buy shorter duration bonds, CDs or a bond fund
  • Have a truly long term perspective?  Buy a long bond and hold it until it matures – you get your $1,000 back

  • Got sizable assets, want protection and still want decent yield? Build a bond ladder
  • Feeling adventurous and have a stomach for risk?  Short TLT (currently $93.57) the iShares 20+ year Bond ETF

I was short TLT at the time of this post. 

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Written by Kevin Berk

May 18, 2005 at 7:47 PM

Posted in Picks and Pans

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