Tips for Nervous Bond Investors

Will investing in bonds be a sucker's bet in the months and years ahead? And if so, are there any ways you can protect yourself? Investors--especially retirees and pre-retirees--have been pondering these questions lately, and for good reason. After all, the conventional wisdom on asset allocation is that folks getting closer to retirement should steer ever-larger shares of their portfolios into fixed-income securities, but the math for bond investors isn't particularly compelling right now.

Current yields, historically a good predictor of bond returns, are ultralow. And the tailwind enjoyed by fixed-income investors in the past--namely, two decades' worth of declining interest rates that pushed up bond prices--is quickly receding into the rearview mirror. Rather than seeing their capital appreciate, bond-fund investors could actually see real declines in their principal values if rates head up. Fixed-income investors recently got a taste of what the future could hold, with bonds of all stripes, but especially rate-sensitive long-term Treasuries, slumping during the past month and a half

Source: Morningstar

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