Hedge your bond portfolio against rising interest rates
A well diversified portfolio will typically have a split of 60/40 between equities and bonds. In between that some investors will hold physical gold or gold equities of 2-10%. The split will be say 55/5/40.
Interest rates have the greatest influence on bond prices. If rates increase bond prices will go down. This could cause significant losses in unhedged bond portfolios.
To quantify the potential impact of rising rates on a bond portfolio, investors look at the duration of a bond. Duration is an approximate measure of the sensitivity of the value of a bond to a change in interest rates. Higher duration generally means greater sensitivity and greater potential for loss when rates rise.
One way to protect your bond portfolio is to buy inverse bond ETFs. Inverse bond ETFs are designed to move in the opposite direction of their fixed-income indexes – as the indexes rise, the ETF will fall and vice versa. These ETFs are designed to act as if they have a negative duration. By adding an inverse bond ETF to a bond portfolio it will make the total portfolio have a much less rate-sensitive duration.
One inverse bond ETF worth investigating is the ProShares UltraShort 20+ Year Treasury ETF .
According to the ProShares fact sheet, the UltraShort 20+ Year Treasury seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2X) of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. This ETF seeks a return that is -2X the return of the benchmark index for a single day as measured from one NAV calculation to the next.
There is no guarantee that the ProShares ETF will achieve its investment objectives.
The information provided in this blog is for educational purposes only. No advice is given to buy or sell any security. Investing involves risk, including the possible loss of principal.
Below is a daily futures chart of US 30 year Treasury bond (ticker symbol – ZBZ17 December, 2017 contract)
On Friday, September 8, 2017 30 year T Bond futures reached a high of $159^31 and declined to $151^07 on Friday, October 6, 2017.
During the same time period ProShares UltraShort 20+ Year Treasury Bond ETF (ticker symbol – TBT) rose from a low of $32.99 on September 7, 2017 to a high of $36.44 on October 6, 2017.
See chart below.
As the Fed gradually starts increasing interest rates, commodities and bonds will in most cases be negatively affected. Rising interest rates means that the opportunity cost of holding gold bullion increases while at the same time the dollar will strengthen.