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MONEY matters

Mark Zaifman's thoughts on money, global economic trends and politics

Rising Interest Rates and Your Bond Investments

Mark Zaifman   |    Fri, Mar 11, 2011 @ 02:53 PM

long-term-investment-strategyy

2010 was a great year for bond investors. Bond index funds did exceptionally well last year. The outlook for 2011 though is quite different. With the anticipation of higher interest rates, bond prices are trending down and yield is increasing.

Does this mean you change your long-term investment strategy? The answer is no. Does it mean you make tactical moves to lessen the effects of potential declines in bond prices? The answer is yes.

Pimco Unconstrained Bond Fund

One bond fund that I believe is well positioned for a higher interest rate environment is the Pimco Unconstrained Bond Fund Minimum investment in this fund is $1000. My one complaint is the high 1.30% annual expense ratio. It’s easy to get spoiled with Vanguards Bond Index Funds charging an average of 0.25% annual expenses. Keep in mind, these are passive index funds. The Pimco bond fund is an actively managed bond fund, that said, the benefits of why an investor should pay higher annual fees needs to be convincing.

Fund’s Duration is Key

The fund is not yet 3 years old, but already has $15 billion in assets, making it the 20th largest taxable bond fund in the U.S., according to Morningstar. The real draw for me is the funds interest rate flexibility. The fund can take its duration from negative three years to positive eight years. That’s a huge range when it comes to bond funds and provides a much needed hedge to higher interest rates.

Vanguards bond index funds, such as their intermediate, short-term, high yield and inflation protected, will still remain as core bond holdings in the portfolios I design. These are rock solid holdings that belong in a well diversified portfolio. But adding a fund that can hedge against higher interest rates is a smart move.

With it being a matter of when short and long-term interest rates start rising, not if, Pimco’s Unconstrained Bond Fund is but one of many strategies to consider in a rising interest rate environment.

With the recent volatility in the stock market spooking investors, it’s more important than ever to stick to your long-term investment plan. And if this market volatility has you wanting to load up on fixed income investments, please read my blog post Playing it Too Safe.

You should consider Pimco Bond Funds' investment objectives, risks, and charges and expenses carefully before investing. For this and other important information, please obtain a fund prospectus at Pimco.com. Please read it carefully before investing.