Fixed Income Choices

[airstyle]

For the Fixed Income of our investments, we hesitate buying bond funds since interest rates will only increase.   Are SHORT-term bonds resilient enough to absorb their periodic value drop as rates climb back up.

I-bonds (Inflation bonds) sound interesting, any advice on these and does anyone know how to go about getting them through Vanguard or Fidelity, or what their symbols are?

What about CDs, MM, GNMAs, or any other ideas or bonds that would be worth considering?

Thanks.

 

[wabmester]

I believe the rule of thumb is that you should expect the value of a bond fund to drop X%*duration for each X% increase in rates.

You can find durations (an average measure of maturity weighted by yield) for most bond funds on just about any financial site.

For a rough estimate of how much rates might change, take any given rate on the yield curve and find the difference from its historical average.  Some people believe that stocks and bonds return to their mean yields over time.

Short-term bond funds should be in pretty good shape since even though they may take a short-term hit, the funds will reinvest at the new higher rates, so the increasing yield will somewhat offset the decreasing NAV.

TIPS and i-bonds are available directly from the treasury (cheapest way to go).   If you want to buy from Vanguard, the ticker is VIPSX.

 

[JWR1945]

Remember that you cannot cash in an ibond before twelve months have passed. You cannot sell it on the secondary market. It isn't just an early withdrawal penalty. You can't get your money.

Still, twelve months is not that long. If you are talking about something other than an emergency fund, ibonds can make a lot of sense. They are attractive while learning about other investments. They are attractive while waiting other investments to become better priced.

Have fun.

John R.