(Hehe, you know me so well!)
Everyone knows (well almost everyone) not to market time the stock market. The bond market is no different. You might not see it, but this is market timing. Ignore the noise, the news reports, and the doomsday articles. You can't guess where the market will go next. Let's review what happened to bonds the last time interest rates soared:
Interest rates spiked pretty high from 1975 through 1981 (the peak). Let's see what happened to intermediate term bonds during this time (orange line):
A $10,000 deposit grew almost 60%!Now let's look at another point on the chart, the two decades from 1950-1970, where interest rates tripled from their record low. What happens to bonds then?
Unfortunately Morningstar's Intermediate bonds graph doesn't start until 1955, so I added "High Yield Bonds", a category which should be
more negatively impacted by a rise in interest rates. Looking at the chart, we see:
- High Yield Bonds more than tripled during this time. With a $10,000 deposit growing to $31,775.33
- Intermediate Bonds more than doubled during this time, despite not starting until about 1955. A $10,000 deposit grew to $23,435.50
Furthermore, even if interest rates
do cause bonds to fall (which hasn't happened any of the other times), you'll end up
better off after a few years:
Source:
https://www.youtube.com/watch?v=F_boP9bu5Bw&list=PLdpkIg5_Ms4At-DZbPbkxujh2EGOnOu6H&index=9Look at how steep the new slope is. And this is with a 30 year maturity. If you're invested in
Vanguard's Total Bond Index Fund, your average maturity date is 7.8 years. This makes your "Point of indifference" about 2.5 years. After that, you are
better off with the higher interest rates.
This is why we say ignore the noise.