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The Fed Walks Backs Away From Being Calendar-Dependent

Stocks in this article: STPZ TIP

It is unlikely that we have seen the last taper scare for the year, and the one from last week may not even be over yet. If you can recognize a panic for what it is and know that there will be a snapback in short order, it should be easier for you to endure future panics.

There are multiple portfolio implications here as well. The Fed is buying assets in the open market every month and keeping interest rates near all-time lows as it tries to stimulate the economy. This will end at some point, and there will be a consequence for markets. This has been known since the Fed started its quantitative easing program, but last week shows us that even a hint of tapering will send markets lower.

In an article last week, I looked at shorter-duration corporate bond ETFs that available from Guggenheim and that allow investors to choose a targeted maturity date.

iShares offers a similar suite of municipal bond ETFs. PIMCO, iShares and SPDR all offer short-dated TIPS ETFs targeting 1-5 years, and these have worked too.

In the last month the iShares Barclays TIPS Bond Fund (TIP), which has a weighted average maturity of 8.6 years, is down 6% compared to just a 2% drop for the PIMCO 1-5 Year US TIPS Index Fund (STPZ).

The other step to take would be for anyone who has not already done so to devise an exit strategy for their longer-dated fixed-income holdings.

If the Fed is back to being more data-dependent then we may see rates go down a little over the course of the summer but probably not back to the lows.

That means the summer would be a good time to shorten your portfolio's average maturity because when the Fed really does end its asset purchases, bond prices are likely to go down much more than they have in the last month.

At the time of publication, Nusbaum held shares of STPZ. His firm also held STPZ on behalf of clients.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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