5 Tips for Bond Investing with "Lower for Longer" Rates

By: Nela Richardson, Ph.D. November 01, 2019

If you're buying on credit or shopping for a mortgage, low interest rates can be helpful. But if you're buying a bond, it's a different story. With global growth slowing and market uncertainties rising, interest rates are likely to stay low for some time.

We're seeing two reasons for this:

  1. Central bank stimulus to combat slowing global growth has decreased short-term rates and increased the share of government bonds trading at very low or even negative yields.
  2. Persistently low inflation (tied to demographic changes and automation) has pushed rates down. Keep in mind that if you hold a bond to maturity, interest rate declines won't affect its income. But adding fixed-income securities to a portfolio can be challenging when yields are low, prices are high and the income from bonds is less than many investors would like.

Source: Edward Jones.

Here are five tips for bond investors today:

  1. Remember the role fixed income plays in your portfolio. Bonds play a valuable role in adding diversification and stability to your portfolio because when stocks fall, bonds fall less or may even rise. In the late stages of a bull market, when volatility tends to be higher, bonds can help increase portfolio returns by lowering risk and smoothing market swings.
  2. Take care where you park your cash. When interest rates are low, it can be tempting to park your cash in instruments with the highest yield.

    Other factors are important to consider, however. When their rates are locked through maturity, certificates of deposit (CDs) can act like bonds, providing a predictable income stream. The variable yield of a money market fund (MMF), however, can change quickly as underlying securities mature and are reinvested at market rates.

    CDs tend to be more valuable when rates are falling, and MMFs are higher-yielding when rates are rising. Because rate fluctuations are hard predict, your time horizon and funding needs should determine where you put your cash.

  3. Get a (bond) ladder. When rates are falling, long-term bonds can help you lock in higher yields for longer. When rates are rising, intermediate- and short-term bonds may be more appropriate because you can reinvest their proceeds at higher rates when they mature.

    Build a bond ladder by buying fixed-income securities across a range of maturities. Each rung of the ladder works to support an upward climb for your total portfolio. This can help ensure your portfolio reflects your comfort with risk even when rates fluctuate. 

  4. Rebalance to reduce risk. Over the past 10 years of the bull market, equities may have become a larger percentage of your overall portfolio. With more uncertainty ahead, it may be time to make sure your portfolio reflects your comfort with risk. Since rates will eventually rise from their current low levels, focus on adding short- and intermediate-term securities, which are less sensitive to interest rate fluctuations than long-term bonds.
  5. Don’t chase yield. High-yield bonds, preferred stock and emerging-market investments may look attractive on the surface, but they’re no substitute for the role high-quality corporate and government bonds can play in lessening the negative impact of volatility on portfolio returns. High-yield bonds not only entail greater risk, they’re more likely to fall during a dip or correction in the market.

Though low interest rates tend to be good for equities, this doesn’t mean your bond portfolio has to suffer. Check with your financial advisor to help ensure you’re maintaining a healthy mix of stocks and bonds, which will help keep your portfolio on track in all types of rate environments.

Important Information:

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

You must evaluate whether a bond or CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.

Including callable bonds may increase the interest rate risk of a bond ladder. Bonds may be called prior to maturity, which could result in lower yields with new investments. 

More Resources:

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3 Ways to Diversify Your Bond Mix

Look at three main categories to diversify your bond mix.

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