For years, Baby Boomers have been moving their money into the bond market in droves to ensure a steady income into retirement. But so far this year, yields have been falling lower and lower — until now. The yield on the 10-year Treasuryhit nearly 2.4 percent on Tuesday, the highest since October.
With the recent uptick in Treasury yields, is it time to reallocate the fixed income portion of your portfolio?
Not so fast. Although 10-year Treasury yields moved up more than 30 basis points (0.3 percentage point) in a week, there has been a huge decline in bond prices, as the broader stock market has been booming. The S&P 500 has more than doubled from its 12-year low reached three years ago on March 9, 2009.
So now may be a good time for Boomers to brush up on their bond allocations to make sure there is some balance.
Jeffrey Christakos, a certified financial planner at Westfield Wealth Management, tells clients to keep in mind there is inherent risk in all investments — even in bonds. Since bond prices have an inverse relationship with yields, if interest rates move higher, bonds issued at lower rates will experience price erosion. Then there is also inflation to consider, which erodes future purchasing power. A higher inflation scenario would drive yields on longer maturity bonds upwards, again reducing the price of the bond.
The key is to stabilize your bond portfolio, Christakos says. Here is what he recommends:
1. Ladder your bond portfolio. Instead of investing exclusively in bonds with longer maturity dates, you can choose to ladder or combine bonds with varying maturity dates within your income portfolio. This can be done independently or through the use of investment managers.
Christakos warns that Boomers should be careful here because the range of maturities is the key to overall return. If you ladder bonds over a 10 year period (i.e. purchase five bonds maturing every two years) vs. laddering over 30 year period (i.e. five bonds maturing every six years) you will experience a significantly lower rate of return. Short-maturity bonds in the ladder can lower overall portfolio yield, however they also can reduce the chances that you may have to liquidate underwater positions if the need to raise funds arises.
2. Choose shorter maturity bond funds. Short-maturity bond funds can also provide investable funds if interest rates rise.
3. Add some high yield corporate bonds. High-yield corporate bonds are riskier than investment grade bonds, but could help offset bond losses if and when interest rates eventually rise, as high yield returns have low correlation to Treasury returns.
4. Pick dividend-paying stocks for diversification. Dividend paying stocks, while also higher-risk than U.S. Treasuries, can offer a source of current investment income with reduced correlation and gains from performance over time. What is critical here is that there has to be a limited need to liquidate the underlying stock (you will be living off the dividends) due to the volatility of the stock price (you don’t want to have to liquidate when the values are low.