Buying bonds: 3 ways to survive rising interest rates

Bonds ain’t what they used to be

(Photo: Carl Pendle/Getty)

(Photo: Carl Pendle/Getty)

For the past 30 years, holding bonds was a no-brainer. And not just as a counterweight to more volatile equities—the steady decline in interest rates since the 1980s caused bond prices to rise, giving their holders’ RRSPs a nice tailwind.

Interest rates, though, have a bottom, and it appears it was hit in 2013. Long-term bond rates have risen about one percentage point since then, and that has caused bond values to fall. Since rates have more room to rise than to fall going forward, we’d better get used to it.

For some, the solution is to reduce fixed income allocations altogether. But for the majority who still value the ballast bonds provide to an RRSP portfolio, there are three things you can do in a rising-rate environment.

Shorten the term

To reduce the risk of capital losses, sell bonds and bond funds with a 10-year-plus time horizon and buy short-term notes instead, says Dominic Bellissimo, a portfolio manager with Dynamic Funds. The yield will be miniscule in the short term, but you’ll be able to reinvest at higher rates later.

Go corporate

Buying corporate along with government bonds will increase your yield. An investment-grade company issue will pay you between 100 and 140 basis points more per year than a government one.

Buy individual bonds

Whatever happens in the bond market, you’ll get your principal back if you can hold a bond to maturity, explains Jason Vincent, president of Matco Financial. Most retail investors just buy bond funds to lower their transaction costs, but this exposes them to market fluctuations. As a result, advisers are increasingly offering the option of buying individual notes again.

“Buy quality bonds at the best yield you can find,” Vincent advises, “and you’ll still have control over your income.”