Getting Ahead of the Curve
How Bond Investors Can Take Advantage of Rising Interest Rates
In December 2008, on the heels of the Great Recession, the Federal Reserve attempted to stave off deflation by lowering interest rates to near 0%. It took seven years before the Fed would raise rates again, but now – eight rate hikes later with more seemingly on the way – most economists agree we’re in a rising rate environment. That presents bond investors with a dilemma: How can you get ahead if your current bonds keep losing value?
One strategy to consider is a bond ladder.
A bond ladder is when you buy a series of individual bonds equally divided across a variety of maturity dates. Then, as one bond matures, you reinvest the proceeds into a new bond that matures at the end of the ladder. As an example, a laddered portfolio might have bonds maturing in 2019, 2020, 2021, 2022 and 2023. When the 2019 bond matures, you would use the proceeds to purchase a new bond maturing in 2024.
By investing and reinvesting in this fashion, you perpetually take advantage of potentially higher rates without locking yourself into a long-term investment. By mixing short- and longer-term maturities, a bond ladder also tends to provide more consistent yields in periods of market volatility.
The risks that apply broadly to bond investments also apply to the bond ladder strategy, including risk of default or not getting enough yield for your needs. Your Baird Financial Advisor can help you determine how well a bond ladder strategy fits your broader wealth management plans.
All investments carry some level of risk, including loss of principal. Some of the additional potential risks associated with fixed income investments include call risk, credit risk, liquidity risk, interest rate risk, reinvestment risk, and inflation risk. Additionally, it is important that an investor is familiar with the inverse relationship between a bond’s price and its yield. Bond prices will fall as interest rates rise and vice versa.
