In the large, friendly letters of Douglas Adams’ The Hitchhiker’s Guide to the Galaxy, DON’T PANIC. We are well aware of the dip in bond market values that is reflected in portfolios. Bond prices move in the opposite direction of yield, so as interest rates rise, the value of existing bonds decreases. What doesn’t change, however (and this is very important), is the redemption value of that bond. Principal and interest continue to be paid monthly, in the case of most CMO classes we own, and those payments are not affected by the change of prices in your portfolio.
Of course, these reassurances can only do so much, as seeing a dollar value decrease is always disconcerting. This scenario is very reminiscent of the last time interest rates rose, about twelve years ago. During that period, our buy-and-hold strategy outlasted the downturn, and we expect it will again in this cycle.
So, don’t panic! Prices are down, but unlike with stocks, there is no need to sell a bond in order to get your returns. All you have to do is wait, and, barring any defaults (we have yet to see any in more than 20 years of experience), your money will be returned, plus interest.
There is even good news! Bond prices declining means everything goes on sale. Suddenly bonds that were selling at 99 are now available for 85. With those low prices come higher yields. Some of these even include double digit yields, like back in the old days of the early 2000s.
Interest rates are likely creeping toward their peak for this cycle. We don’t expect them to exceed the 5.25% reached in 2007. With our strategy, the optimum time for buying bonds is when interest rates are near their highest level for that cycle, so, as we approach that time, we will find more and more enticing opportunities.
The best advice we can offer in these turbulent times is to stay the course. Focus on the maturity value of your bond portfolio (included each quarter in your Cooper Capital statement), and don’t spend too much time watching the stock market, unless you’re a roller coaster fanatic. And if you haven’t already, read The Hitchhiker’s Guide to the Galaxy, a fun and quirky sci-fi adventure novel.
This information is not intended to be used as the only basis for investment decisions, nor should it be construed as advice designed to meet your particular needs. You are advised to seek the advice of your financial adviser, legal or tax professional, prior to making any investment decision based on any specific information contained herein.
