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Bond Investors Who Time Rates Face Host of Risks

Contributed by mm | August 4, 2004 11:34 AM PST

WSJ gave out a second look of many financial advisors' suggestion that people should move to shorter maturity in fixed income portfolio in this rising-rate environment.

In this article, Kaja Whitehouse argues that people are paying a fee in terms of interest loss (by moving to shorter maturities) in this timing game. An example is cited as when timing is correct but interest rate does not increase as quickly as timed, as it is the case in 2001, the hypothetical customer would take four years to recoup the interest loss.

When it comes to fixed income, I always trust Bill Gross and his PIMCO. His monthly installment of Investment Outlook is among my favorite readings. As a result, I dumped all my fixed income positions in my 401(k) (coincidentally, one of the funds I dumped is PIMCO Total Return). While a little bit more interest is certainly appealing, I'd like to wait in the sideline until the cloud is clear for the interest rate environment. The cost of waiting is not so huge right now: VirtualBank can provide me with 2.15% APY in money market account; compared with today's 5-year treasury yield of 3.6% and 10-year yield of 4.4%, I'm only sacrificing 1.5% and 2.3% respectively -- 50 basis points increase in either yield will deal a blow much larger than 2.3% to fixed-income investors not moving to shorter maturities.

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