Even if you have been an investor for 30 years, you don't really know about high interest rates.
U.S. interest rates peaked in October 1981, when the 30-year Treasury bond traded at 15%. The dream, when I started investing later that decade, was of "hat-sized yields" of 6%-7%, which didn't become the norm until the early 1990s.
Today, interest rates are less than half that. Early in 2018, the rate on the 30-year Treasury stood around 2.7%. By mid-February, the yield on that long-term debt had spiked about 15% to around 3.1%, which is roughly where it trades today.
Investors panicked at the time, and higher interest rates still have investors worried. For good reason. After all, higher interest rates make bonds more competitive with some dividend stocks, and perhaps more importantly, they make borrowing more expensive for corporations, eating into the bottom line.
The Federal Reserve has already raised its benchmark rate once this year, is about to do so a second time and is expected to hike interest rates once or even twice more before 2018. Your portfolio could well feel the shockwaves from these actions - though you can minimize the damage by taking a few actions. Here are six techniques suggested by money managers.
You can find steady (albeit modest) income at the very short end of the yield curve.
Right now, major brokers are selling 3-month certificates of deposit that pay interest of about 2%. And the Vanguard Short-Term Bond ETF (BSV) of one- to five-year U.S. government, corporate and international bonds yields 2.8%.
Aash Shah - a senior portfolio manager for Summit Global Investments in Bountiful, Utah - says big investors can build a "ladder" of short-term bonds spanning three and six months, as well as one and two years, held to maturity. When bonds mature, they can be rolled into longer-term instruments, whose rates will have increased.
James Demmert - management partner at Main Street Research, a wealth management firm in Sausalito, California, agrees. As interest rates rise, buy individual bonds with maturities of just one to five years. Bond mutual funds and exchange-traded funds don't have maturity dates, as bonds do, "and will continue to decline as rates rise." But proceeds from individual bonds can be reinvested at higher rates.
Kate Warne, investment strategist at Edward Jones in St. Louis, expects the Federal Reserve to raise short-term interest rates quickly if inflation accelerates. "If you have more in short-term bonds, you can reinvest as those bonds mature and benefit as interest rates rise," she says.
Copyright 2018 The Kiplinger Washington Editors