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Bond strategies when rates rise

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It may be a couple of years off, but at record lows, interest rates are bound to rise again. Bonds fall in value as interest rates rise. In a Money Talk Video, Kyle Tetting offers options to consider to help protect the bond portions of a balanced investment portfolio. Here is a transcript of the video.

I think, for an investor coming out of a period of secular, falling interest rates, a period that’s been very good for bonds, the potential for rising rates can be a pretty scary thing. Bond prices tend to be hurt hard by rising interest rates when we look at bonds as a whole.

Some investors might think that a bubble is forming in an environment where rates have fallen for some time. Truthfully, it’s very difficult for a bubble to form in bonds as a whole because of one very important underlying principle in bonds, and that principle is that bonds have a set maturity and a set price – what we call a par value. It’s a date in the future in which the bond investor is going to be paid back from the issuer as long as that issuer remains solvent.

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I think that that concept of bonds maturing is a very important principle for an investor concerned about the potential for rising rates. We can look to bonds with shorter maturity – so a bond that’s coming due soon, knowing that bonds that are near maturity don’t deviate much from that par value.

Another alternative is to look for bonds in areas of the world where interest rates are moving in a different direction than they’re moving here. Opportunity exists both to diversify risk and potentially to make some money in bonds just by looking at alternatives outside of traditional indexed bond approaches.

Kyle Tetting is an investment advisor at Landaas & Company.

Money Talk video by Peter May

(initially posted April 18, 2013)

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