A Blast from the Past

Bond FundsMost recently we’ve learned that the Federal Reserve has discussed “gating” bond funds. Apparently, in their quest to keep the persona of American wealth and recovery alive and well they are suggesting that the stock market and not the bond market is the place to be for everyone. Unfortunately or fortunately everyone doesn’t buy that thinking thus the typical scare tactic which could turn into reality is being deployed by the Federal Reserve.

Rates will eventually rise they suggest and you will lose your principle since as interest rates go up bond prices go down. There could be a “run” on the bond funds which could force delays or even refusals of the return of your principle. In addition the Fed mentions a penalty for those getting out of their long term investments sooner rather than later. All of the prior leads the sensible thinking individual to the conclusion that to avoid all of these problems one should exit bond funds NOW.

But where to go with one’s money?

The Fed, of course, has the answer, dabble in the stock market and avoid all of the other hassles after all riches are available to everyone everyday at 9:30 eastern standard time at a place called the New York Stock Exchange.

There is, however, another way for the bond investor to eliminate both the potential “gating” risk and the interest rate risk without speculating in the casino that indeed opens every business day at 9:30 Eastern standard time.

That method is the first by individual treasuries and/or investment grade corporates then ladder them over a period of time. Depending on the money available they could be done semi-annually, annually, or even over a period of years.

If interest rates rise as many believe fresh maturing principle can be rolled over at even higher rates.

Simple issues unlike bond funds have a maturity date thus removing the falling principle problem if held to maturity. In addition, you are not co-mingled with other investors thus the removal of the “gating” potential.

Buying different maturity CD’s and even treasuries was a successful strategy in the past, as interest rates were falling, to lock in yields and not be subject to the interest rate risk. Now it seems the same strategy could be successful in a rising rate environment to lock in liquidity and not be subject to the same interest rate risk.

It is possible that laddering’s time has come again.


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With his passion for economics, Bill Tatro has been entertaining audiences on the radio and in seminars for over 30 years. Bill’s dynamic and no nonsense style on his former radio show It’s All About Money has made him one of his stations’ most popular show hosts.