"Is your portfolio adequately protected from rising
interest rates and a bond bubble?"
I posed that question to
Income & Prosperity
readers just a few weeks ago. And the responses - while not
surprising - were certainly concerning.
That's because 60% of my readers responded by saying that they
were either not protected from rising interest rates, or that
they did not know how their investments would weather a "bond
And that concerns me. I suspect that even the 40% of my
readers who believe they
protected from a bond bubble may face considerable losses if and
when interest rates start rising.
That's because the days of owning U.S. Treasuries and storing
them in your safe deposit box are long gone. With the
advent of mutual funds and more recently ETFs, investors now own
most bonds through funds.
There are of course bond funds like the
iShares Barclays 7-10 Year Treasury (
And as the name suggests, the fund invests directly in U.S.
Treasuries bonds with maturities of 7 - 10 years.
Now, avoiding a U.S. Treasury fund like the iShares is easy to
do - just look no further than the name. But there are many
diversified bond funds that also have considerable exposure to
long duration U.S. government bonds.
Vanguard Total Bond Market ETF (
. This fund manages $110 billion in investments. Vanguard is a
great investment manager, but this fund is mandated to invest in
bonds. With 44% of its assets invested in U.S. Treasuries
and government agency bonds, investors in this fund have a big
stake in U.S. government debt.
Vanguard isn't the only fund company with a big stake in U.S.
Treasuries. Almost every bond fund owns U.S.
You know that I'm not someone to promote doom and gloom.
I'm an optimist who believes that America's economic recover
continues to slowly unfold. And I see bright days ahead for the
U.S. economy and the stock market.
Let me be clear about the bond bubble. I don't believe
that the U.S. government is going to default on its debt
payments. I simply believe that we're in the early stages of a
rising interest rate environment.
As interest rates rise, bond values will fall. Bond
investors who hold their bonds to maturity can expect to be paid
out 100% of their principal.
But investors in bond funds can't hold the fund to maturity,
since funds always roll over maturing bonds to buy new bonds. As
a result, anyone holding a bond fund - or even an ETF that holds
Treasuries (many of them do) - will experience very real losses
as bond prices fall…
Ever since Fed Chairman Ben Bernanke suggested a slowdown in
bond buying - also known as tapering - yields soared while values
fell. For example, the yield on the 10-year U.S. Treasury
jumped 64% since May.
The decline in bond funds already started. The Vanguard fund I
mentioned fell 5% since May. And the Barclays Treasury fund is
down 8%. The riskiest bonds are those with longer maturities.
These losses may seem small, but they have investors fleeing
from bond funds. Last week alone, investors withdrew $11 billion
from bond mutual funds. And since the end of May, outflows
totaled $97 billion.
But remember these losses and outflows happened based on the
idea that the Fed
slow down its $80 billion per month bond buying program (also
known as QE3).
What will happen when the Fed actually follows through on its
threats? Or when the Fed stops buying bonds altogether? Or
when the government actually increases interest rates to attract
investors to U.S. Treasuries?
Today we are in uncharted territory. With Ben Bernake stepping
down as Chairman, the future actions at the Fed remain
My concern about rising interest rates and the impact on bond
values encouraged me to spend the last several months focusing my
investment research on this pressing topic. The result is
an in-depth special report titled
The Bond Bubble Survival Guide
If you share my concerns - and want to protect your portfolio
from rising interest rates and the Fed's reckless policies - than
I encourage you to read my report.
You can get all the details by clicking here
I firmly believe this bond story is the single biggest issue
that will impact investments in the coming years, and I want to
help assure that you're prepared for the future.