U.S. Treasury bonds are supposed to be safe, right? The cream of the crop when it comes to investment options?
But I’m here to tell you that line of Wall Street “wisdom” is absolute bunk. You can easily lose money investing in them at the wrong price, at the wrong time, and in the wrong interest rate environment.
Just take a look at this chart of the iShares 20+ Year Treasury Bond ETF (TLT) – a benchmark ETF for long-term U.S. government bonds.
Doesn’t look pretty, does it? This ETF plunged to around $115 at the beginning of July from a high of more than $138 in January. That’s a loss of more than 17% in just six months.
Considering 30-year bonds only yielded around 2.2% when the selloff began, you’re talking about a situation where investors lost more than eight times their annual yield in only half a year. Yikes!
That just goes to show you that you can lose money … even on supposedly “safe” investments … in a rising interest rate environment like we have now. So how can you generate income safely? What other steps can you do to get your financial house in order before rate surge too much?
* Lock in long-term financing now if you’re shopping for or building a home. As Treasury yields rise, so will rates on 30-year fixed-rate mortgages.
* As the Federal Reserve is forced to “chase” the long-term rate market higher by raising short-term rates, it will start to drive the price of variable rate loans higher, too. That means it will get more expensive to carry balances on home equity lines of credits (HELOC) and variable rate credit cards. Consider converting to fixed-rate cards and/or fixing the rate on a portion of your HELOC, an option many banks make available to customers.
* When it comes to the fixed-income portion of your portfolio, stick with individual bonds, bond ETFs or bond mutual funds that have an average maturity and effective or modified duration of two to three years, max.
* Average maturity means the weighted average number of years in the future that the bonds in your ETF or fund mature. Duration is a measure of interest rate risk. Roughly speaking, a duration of 10 means you will lose 10% of your money for every one percentage point rise in interest rates.
Editor’s Note: Five mainstream myths about interest rates
* One force driving interest rates higher is an improving economy. Bonds with lower credit quality can actually fare okay in that environment, even if the overall trend for rates is higher. Reason: The perceived credit risk of investing in sketchier companies often declines on the assumption an improving economy will boost their profits, making it easier for them to make good on their debts.
So if the stock market and economy keep going up, even as interest rates rise, consider swapping OUT of Treasuries and IN to higher risk bonds. But still keep your maturities and durations lower. I know this is a lot to absorb, and that it can be confusing at times.
But I’ve been following the interest rate markets closely for more than 17 years, and I can honestly tell you they are at the heart of every borrowing, lending, and investing decision in the world! You simply need to have a working knowledge of rates if you want to maximize your chances of financial success in life.
That’s why I’m so excited to re-introduce my groundbreaking course titled How to Profit From Changing Interest Rates to Weiss Educational Services readers this week.
Click here now to check out the first session absolutely free.
Until next time,