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

DEWITT, Mich. - Feb. 18, 2020 - PRLog -- 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:

• 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.

• 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.

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.

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.

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.

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.