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Will Bonds Suffer In 2013?

I have around 20K initial investment and will also be adding 1K/mo for the next two years to USATX which is a bond fund ran by USAA. The fund is highly rated and has good returns for the 10/5/3/1 year time frame. My concern is that with interest rates expected to rise in 2013 I will lose money? Anyone have advice? Thanks!

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  • JoeyV
    Lv 7
    8 years ago
    Favorite Answer

    Such stupid advice on YA.

    "You don't really lose money" Let me positively assure you beyond any doubt that bond mutual funds absolutely can lose value. USATX can absolutely lose money. There is no question. I would bet my CFA and my Ph.D. on the notion that bond funds can lose money. It is completely irresponsible and ridiculous to suggest to someone that a bond mutual fund can't lose money. Nuts.

    "Bonds aren't investment grade" Say what? Investment grade bonds are investment grade. Anything rated BBB or higher is investment grade. From the USAA website "The fund invests principally in investment-grade, tax-exempt securities" so apparently that is just false and stupid.

    But to the original question -

    Nobody knows what interest rates are going to do in 2013. There is still an absolute ton of lendable money out there and not much demand for it. That means that calling for interest rates to rise is usually just based on this idea that "they can't go much lower" or "you can't make lots more money on bond appreciation". If interest rates went up by 1% (plausible) you would lose about 5% off the NAV of the mutual fund. Can you handle that? I think a 2% rise in interest rates is not very plausible but you would lose in the neighborhood of 10% (less actually because of convexity).

    The real concern here is the tax exempt status of these bonds. Do you need the tax exemption (i.e., are you in a 39% tax bracket?). If you aren't in a 39% tax bracket (and people who say they have $20K to invest first time in bond funds usually aren't) you shouldn't be buying a tax exempt fund. The equivalent fund for people who don;t have tax problems from USAA is USIBX which is a fine fund from a fine fund family. I think intermediate term bonds is a decent idea now so I think you are on the right track.

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  • John W
    Lv 7
    8 years ago

    You don't really lose money, you still receive the same yield from your bonds, it's just that if you sold your bonds, you would have to sell them at a discount to compete with the higher rates that are available. Of course, you shouldn't be 100% in bonds. If you want to be conservative you should be in a fund that's about 25% in stocks and 75% in bonds, this will have a lower risk and higher returns than a 100% bond portfolio. The bond funds are used by people who want to balance their own portfolio in exchange for lower fees on the funds, they would often be paired up with an index fund and the monthly distribution between the two adjusted for the desired risk.

    Yes, as the interest rise, the value of your bonds will drop. This wouldn't be a problem in a balanced portfolio but may be an issue with an all bond fund.

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  • 8 years ago

    Bonds are not investment grade. One has to factor in inflation and taxes. Right now, the yield has to be 5%-7% just to turn a profit.

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