Bond ETFs: The Impact of Higher Rates

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 |  Includes: HYG, IPE, JNK, PCY, STPZ, TIP
by: Tom Lydon

Bonds have been one of the the safe-haven assets of choice since the market meltdown last year, but as the interest rates flirt with higher numbers, are bond ETFs still where you want to put your money?

Many investors know that as interest rates go up, bond prices go down. Case in point: If interest rates were to rise by 1%, the price of a 30-year U.S. Treasury bond would decline by 14.13%, according to a T. Rowe Price analysis. The price decline on a 10-year bond would be about half that.

Kathy M. Kristoff for The Los Angeles Times reports that price declines on shorter-term Treasury bonds would be more modest — roughly 2% for a note with a two-year maturity and 4.5% for one with five years to go before the principal would be repaid. If rates rise more, bond prices will drop even more.

Paul J. Lim for Blogging Stock reports that the days of making easy money in a Treasury bond are no more. The factors that fueled the bond boom are becoming unraveled: the inflation decline, and the sharp drop in market interest rates. Also, on a global scale, investors began fleeing to Treasury bonds as a safe haven when the market went bust.

There are three choices for those investors that are staying in bonds: Stay with the Feds and invest in a Treasury bond, look overseas to a Treasury bond in another country or if you’re okay taking on a bit more credit risk add some high-quality munis and corporates to the mix of your portfolio.

Among the many bond ETF options:

  • PowerShares Emerging Markets Sovereign Debt (NYSEARCA:PCY)
  • iShares iBoxx $ High Yield Corporate Bond (NYSEARCA:HYG)
  • SPDR Barclays High Yield Bond (NYSEARCA:JNK)
  • iShares Barclays TIPs Bond ETF (NYSEARCA:TIP)
  • SPDR Barclays Capital TIPS (NYSEARCA:IPE)
  • PIMCO 1-5 Year U.S. TIPS (NYSEARCA:STPZ)

Disclosure: None