Look Out Below: How to Prepare Your Portfolio for Falling Bond Prices
DON'T lose interest.</br></br>Worried that the bond market is vulnerable after the heady gains of the past few years? You might be tempted to withdraw to the safety of a money-market fund. The problem is, that means giving up the 4% or 5% interest rate available on bonds and substituting the wretched 0.7% yield now offered by money funds.</br></br>Want to do better? Here are two ways to reduce your bond portfolio's risk, while still clocking decent gains.</br></br>-- Sounding the Retreat: If economic growth accelerates, inflation is likely to perk up, driving interest rates higher. That would be bad news for bond prices, which move in the opposite direction from interest rates. Indeed, 10-year Treasury-note prices have edged lower this year as stocks have climbed modestly.</br></br>Even without a big economic rebound, inflation and interest rates could climb. After all, the tumbling dollar is likely to shove up the price of imported goods. Inflation could also be re-ignited by ballooning government spending, as Washington aims to cut taxes while also grappling with the cost of the Iraq war and its aftermath.