Impacts from interest rate hikes are felt throughout the fixed-income markets. Interest rates on new debt rises, but prices of existing bonds tend to decline, cautions mutual fund expert Walter Frank, editor of MoneyLetter.
Money market funds are usually the most immediate beneficiaries from rising interest rates, as their very short maturity profile allows for reinvestment in higher-yielding securities at a quicker pace than funds investing in longer maturity obligations.
Within our model portfolios, the shortest-term bond funds have fared the best against the backdrop of gradually rising rates. That mirrors the performance of Morningstar’s bond categories this year.
Through the end of September, the bank loan fund category has had the Best year-to-date return, up 3.21%, followed by the high-yield category, ultra-short bond, and short-term bond, all of which are in positive total return territory. Beyond that, returns turn negative.
We recommend our bond fund allocations as a key diversification tool. (As such, we do not typically allocate to riskier categories.) Since bonds have a low correlation with the stock market, they often prove a stable haven in times of stock market turbulence. And they provide Yields above what can be earned in cash.
Fidelity Total Bond (FTBFX) is categorized in the intermediate-term bond category. FTBFX focuses on investment grade bonds like its benchmark, the Bloomberg Barclays US Aggregate Bond Index.
Recently, US Government issues accounted for 37% of assets and corporate debt for 35%. The fund can also invest up to 20% of assets in noninvestment grade debt; about 12% of assets were in high-yield securities and 5% in emerging markets.
Manager Ford O’Neil seeks to add value via sector, individual security, or yield curve moves, while keeping the fund’s duration (a measure of interest rate risk) in line with the benchmark.
