Bond Investing when Rates Climb

The following is an excerpt from an article in the Globe & Mail: 

With central bank interest rates sitting near zero they only have one direction to go, and it’s just a matter of when. As rates rise, bond prices fall. Historically, however, corporate bonds offer more protection against rate hikes than government bonds. In 1994, for example, as rates shot up after the recession, the returns on government and corporate bonds in aggregate was a negative 4 per cent. Corporate bonds themselves declined only 3 per cent and short-term corporate debt remained mostly stable, he says. There are several options for getting into the corporate bond market. Individuals can buy bonds directly through a discount trading firm and hold them for their interest payments or try to sell them for capital gains. This approach lets an investor cherry pick individual bonds for their yields and performance. But there are shortfalls to this method, largely because bonds are bought and sold by traders in what is essentially an over-the-counter market. It’s a forum that lacks transparency and liquidity for the retail investor, who won’t get the same price as a large institutional buyer or seller. “It’s all about flow,” says Mr. Palombi. “If you’re not in the flow, you can’t execute your strategy.” It’s also very difficult for an individual investor to build a diverse portfolio of bonds because there are more characteristics to consider than there are for a stock. In addition to industry sector, spreads and credit, investors must weigh the different characteristics of the many bonds a company may issue. There are so many variables, in fact, that it can be difficult for an individual bondholder to understand why any single bond may suddenly lose money, he warns.  Read the full Globe & Mail article here.

This entry was posted on 8. January 2010 at 03:06 and is filed under Investing, Fixed Income. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.