How To Play Rising Rates; The Bond Boom Has Left Many Investors Vulnerable to a Surprise Jump in Interest Rates. Here's How to Protect Yourself--and Profit
Author: Ben Levisohn</br></br>Bond yields hit record lows again this week. Is it time to start positioning your portfolio for rising rates?</br></br>At first blush such a move might seem like portfolio suicide. The main drivers of rising interest rates--economic growth and inflation--are nowhere in sight. In fact, Treasury yields could fall further if the Federal Reserve starts buying bonds again in a widely anticipated maneuver known as "quantitative easing."</br></br>But step back from day-to-day market gyrations and a different picture emerges. Bond yields have fallen for most of the past three decades. A $1,000 investment in the U.S. government debt in 1980 would be worth about $12,970 today, according to the Ryan Labs Treasury Composite Index. Treasury prices, which move in the opposite direction of yields, have surged 9.3% this year alone.</br></br>Now consider a different era: 1949 through 1979. Over that 30-year span, a $1,000 initial investment in Treasurys would have turned into a far humbler $2,950. That's because yields soared during the period; by 1980 the yield on the 10-year Treasury had reached a record high of nearly 16%.