{"id":50868,"date":"2023-08-20T18:36:50","date_gmt":"2023-08-20T22:36:50","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/should-you-buy-bonds-now-how-to-protect-yourself\/"},"modified":"2023-08-20T18:36:53","modified_gmt":"2023-08-20T22:36:53","slug":"should-you-buy-bonds-now-how-to-protect-yourself","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=50868","title":{"rendered":"Should You Buy Bonds Now? How to Protect Yourself."},"content":{"rendered":"<div id=\"js-article__body\" itemprop=\"articleBody\" data-sbid=\"WP-BAR-0000721722\">\n<div data-layout=\"wrap\n              \" data-layout-mobile=\"\" class=\"\n        media-object\n        type-InsetMediaIllustration\n          wrap\n  article__inset\n        article__inset--type-InsetMediaIllustration\n          article__inset--wrap\n    article__inset--lead\n  \"><\/p>\n<p>        <!-- eventually when we know what this card will be we can change it and leave this one --><\/p>\n<figure class=\"\n        media-object-image\n        enlarge-image\n        img-wrap\n        article__inset__image\n      \" itemscope=\"\" itemtype=\"http:\/\/schema.org\/ImageObject\"><\/p>\n<div style=\"padding-bottom:66.66666666666666%;\" data-subtype=\"photo\" class=\"image-container  responsive-media article__inset__image__image\"><\/div>\n<\/figure><\/div>\n<p>The most aggressive Federal Reserve rate-hiking campaign in decades crushed the bond market in 2022, sending the iShares Core U.S. Aggregate Bond Bond ETF down 13%.<\/p>\n<p>After rebounding earlier in the year, bonds have produced more losses in recent days as yields climbed sharply. Bond prices decline when yields rise.<strong>\u00a0<\/strong><\/p>\n<div class=\"paywall\">\n<p>Investors buy bonds for safe income, not double-digit losses. But there is a silver lining to the bond market wipeout. Yields have risen to levels not seen in years, giving patient investors the opportunity to bolster portfolios with bonds with the potential for both high income and capital gains.<\/p>\n<p>For retirees and those nearing retirement, the question is where in the wide world of fixed income should they invest? What\u2019s the right duration? Short-term Treasuries\u2014including 3- and 6-month T-bills\u2014are sporting yields higher than 5.4%. That\u2019s enticing. But if the Fed begins cutting rates in 2024, longer-term bonds will be the better investment.<\/p>\n<p>Here are three things to keep in mind while constructing your bond portfolio.<\/p>\n<h2>1. Start Extending Duration<\/h2>\n<p>If you\u2019re in or close to retirement and your goal is to generate income and reduce portfolio risk, \u201cwe have been suggesting investors move out in duration and buy intermediate-term bonds, in the five- to 10-year area,\u201d says Kathy Jones, chief fixed income strategist for Schwab Center for Financial Research.\u00a0<\/p>\n<p>Jones suggests a laddered approach so investors can spread out various bond maturities over time. (A bond ladder is a portfolio of individual bonds that mature on different dates, designed to provide income while minimizing exposure to fluctuations in interest rates.)\u00a0<\/p>\n<p>Target the average duration for a laddered bond portfolio to around six years, Jones says. Those can generate a 5%-5.5% rate depending on how much credit risk you want to take. \u201cThat\u2019s been the highest yield you could get in about a decade and the highest real rates we\u2019ve seen in a very long time,\u201d she says.<\/p>\n<p>Jeffery Elswick, director of fixed income at Frost Financial Advisors, similarly recommends laddering bonds from two- to 10-year maturities, with an average maturity around five years. \u201cYou\u2019re locking in a higher yield than what we\u2019ve had for most of the last decade,\u201d he says.\u00a0<\/p>\n<p>Elswick says it makes sense to take more duration risk\u2014but not too much. \u201cWe\u2019re recommending not having much exposure at the long end,\u201d he says, since they have the lowest yields and highest risk. \u201cYou\u2019d be giving up even more near-term income by investing in 30-year securities rather than 5\u2019s and 7\u2019s.\u201d Short duration carries less price risk, but longer-duration bonds provide more yield and total return certainty\u2014a crucial factor when you have to think about funding the next 20 to 30 years of retirement.<\/p>\n<h2>2. Shorter-term Bonds Look Great Right Now, but Don\u2019t Forget Reinvestment Risk<\/h2>\n<p>Short-term Treasuries and money markets are sporting yields upward of 5%. Shouldn\u2019t retirees park a good chunk of their fixed income portfolio in this corner of fixed income and take comfort in the safety and the sizable yield?\u00a0\u00a0<\/p>\n<p>Actually, no. Consider reinvestment risk, or the risk of having to reinvest a maturing bond at a lower interest rate in the future. Essentially, these currently high yield levels are fleeting and likely won\u2019t be as high down the line when your bond matures and you want to reinvest your money.<\/p>\n<p>\u201cIf you think you\u2019re going to roll over T-bills for the next five years at 5%, you may be disappointed,\u201d Jones says. \u201cWhat are you going to do if yields come down? Because that\u2019s what the inverted yield curve is telling us\u2014that the Fed is forecasting yields to fall.\u201d<\/p>\n<p>While rates may not drop in the next six months as the Fed keeps rates high to vanquish inflation, by staying short you will miss out on capital appreciation of longer-dated securities if rates move lower. Just as bond prices tumbled last year amid rising rates, they could soar next year amid declining rates.\u00a0<\/p>\n<p>Consider the likelihood that yields on T-bills and cash instruments have reached their peak. \u201cIf we\u2019re right and the Fed has increased rates for the last time, all those types of securities and money-market funds have reached their maximum,\u201d says Elswick. \u201cThey\u2019re not going much higher in terms of the yield they\u2019re offering.\u201d<\/p>\n<h2>3. Inflation Protection Has Gotten Cheaper<\/h2>\n<p>Treasury inflation-protected securities, or TIPS\u2014a type of Treasury bond whose principal is indexed to inflation and used to protect investors from inflation\u2014are another option for fixed-income portfolios.\u00a0<\/p>\n<p>Retirees in general should have some type of inflation protection, and TIPS are one of the best ways to do that, says Amy Arnott, portfolio strategist at Morningstar, who adds that yields for TIPS are still attractive, especially if you stay with maturities of five years or less.<\/p>\n<p>The market is pricing in an expected inflation rate of 2.3% now. \u201cIf you buy TIPS at this level, where the current real yield is about 2.12% on a 5-year TIP, you have kind of a built-in hedge in the event that<strong>\u00a0<\/strong>inflation turns out to be higher than the market is expecting,\u201d says Arnott. \u201cI think that\u2019s a real possibility\u2014even though we\u2019ve seen good inflation numbers recently.\u201d<\/p>\n<p>Write to editors@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n<p>Read the full article <a href=\"https:\/\/www.marketwatch.com\/articles\/bond-buy-yields-protection-3c76a5ec?mod=investing\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The most aggressive Federal Reserve rate-hiking campaign in decades crushed the bond market in 2022, sending the iShares Core U.S. Aggregate Bond Bond ETF down 13%. After rebounding earlier in the year, bonds have produced more losses in recent days as yields climbed sharply. Bond prices decline when yields rise.\u00a0 Investors buy bonds for safe [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":50869,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-50868","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Should You Buy Bonds Now? 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