NEW YORK (MainStreet) — Investors who are concerned that owning bonds are no longer a safe haven when interest rates could rise later this year have several options.
One tactic is to purchase Treasury and investment grade corporate bonds for their retirement portfolios. Investors should shy away from any bonds whose maturities are longer and favor those which are a shorter term duration such as five-year Treasuries compared to 30-year Treasuries, said Robert Johnson, CEO of The American College of Financial Services in Byrn Mawr, Pa.
Volatility in the stock market is expected to be part of the norm this year as the Federal Reserve weighs the economic outlook of the U.S. As the Fed decides when it will make its first rate hike since 2006, economists are now leaning toward an increase from nearly zero to occur in September instead of earlier predictions of June. The Fed will continue to monitor the economic progress of the U.S. and progress of the labor market. Fluctuations in the dollar are also affecting the performance of the market.
Keeping fixed income in your 401(k) or IRA in an environment where interest rates rise can be tricky. Johnson, along with co-authors Gerald Jensen of Northern Illinois University and Luis Garcia-Feeijo of Florida Atlantic University, researched returns in the bond market relative to interest rate environments and published their findings in the book, Invest With the Fed (McGraw-Hill, 2015).
The research found a pattern in the returns of Treasury bonds, U.S. government agency bonds and investment grade corporate bonds. All three types generated “very similar returns” whether interest rates were rising or falling. The highest returns in these three types of bonds occurred when rates were neither rising nor falling.