Why bond investors should not fear rising interest rates

School holidays are over, my kids are in school, and my blogging will resumes! I will now answer some questions posed to me recently.

Am I concerned about rising interest rates?

Yes, bond investors have to keep an eye on interest rates. I hold corporate investment grade bonds, where bond prices are affected by

  1. issuer credit risk
  2. interest rates

When yields rise, the value of bond holdings will indeed fall.

Since interest rates will likely be rising, should we sell our bonds? 

No I will not sell my bonds lol. Definitely not because of interest rates.

  • Bonds provide stability of income
  • bonds cushion stock prices falls.
  • bonds do not crash like stock prices
  • Sell bonds when credit risk of company turns sour.

What can investors do about interest rates rising?

No worries. By applying all of the following, rising interest rates concerns can be swept aside:

  1. Hold the bonds to maturity, so that principal is protected
  2. Intentionally construct a bond portfolio with staggered maturity. Most people focus on buying bonds that are cheap, high yield, or investment grade. These are all important to me. But above all, they must fit my portfolio. Another way to put it is : instead of buying the best football player, good football coaches try to buy football players that fit their team’s way of playing, so that the effect is greater than the sum of parts.
  3. Re-invested when bonds mature, at lower prices if interest rates rise.
  4. Do either of :
    1. Be invested fully. Try to invest in bonds with maturity less than 2 years.
    2. Keep some money aside so that when bond price fall, invest only when interest rate increase. One way to ensure this is through the use of margin accounts.
  5. Be disciplined to do the above.

I consider point 2 “portfolio with staggered maturity” as the most important key to overcome rising interest rates. That why bond fund managers are not worried about rise of interest rates. See this link. :  https://www.sellwoodconsulting.com/rise-and-shine-why-bond-investors-still-shouldnt-fear-rising-rates/

If you need help to construct a bond portfolio, please contact me.

 


  • I'm a remisier with Maybank Kim Eng, and as a bonds and REITs investor myself, I guide my clients to build resilient bonds and REITs portfolios. If you like to be guided, please contact me regarding how to become my client; It's free!