A Rising-Rate Survival Guide
The spring storm in the Treasury market is leaving bondholders scrambling for shelter. Since March 17, the yield on the 10-year Treasury note has gone from 3.65% to 4.42% at one point (on Wednesday) and investor sentiment toward Treasuries is at its lowest in at least 12 years, according to a weekly poll of clients by J.P. Morgan Chase.
Some analysts, like Andrew Harding, portfolio manager for Armada Funds, say the majority of the damage already has been done, but rates could still possibly rise another 25 to 50 basis points by year's end.
Paul Mendelsohn, technical strategist for Windham Financial, offers a gloomier forecast, saying that "if the 10-year breaks through 4.66%, there's not much resistance until 5.5%, which was the high in March 2002."
Nevertheless, for fixed-income investors searching for that elusive umbrella in the sudden storm, there are a few strategies to consider in a rising rate environment.
Inverse Bond Mutual FundsInverse bond mutual funds are an increasingly popular tool for investors who are convinced rates are headed up. The funds increase in value if interest rates go up, a feat of financial wizardry accomplished by portfolio managers short-selling Treasury bonds. The two largest funds in this category are the $1.4 billion ( RYJUX)Rydex Juno Investor fund and the $375 million ( RRPIX)ProFunds Rising Rates Opportunity fund. The Rydex Juno fund's benchmark is the inverse of the daily price movement of the 30-year U.S. Treasury bond, often referred to as the long bond. If the fund meets its objective, the value of the fund's shares will increase when the price of the long bond decreases. For example, if the price of the long bond goes down by 2% (lifting yields higher), the value of the fund's shares should go up by 2% on that day.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV