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For some reason my CFT, CIU, CSJ, and LWC are -2.95% overall, when the rest of my stocks are at +8%. Is there any specific reason why Corporate Bonds are going down while the market is climbing?

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2 Answers 2

up vote 5 down vote accepted

Bonds and equities are usually the inverse of each other. As rates start to rise the value of your existing, low rate bond portfolios will decrease.

With rates near all-time record lows, holding anything other than short-duration bond funds is a risky proposition. If you want income, look at shifting toward dividend equities.

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I guess the next question is, should I sell part of my bonds and buy stocks? –  Geo Dec 16 '10 at 23:33
    
If it were me, I would start shifting money out of the long-term funds, either into short-term bond funds or equities. No rush, slowly rebalance over time. Make sure you stay diversified in your equity holdings. –  duffbeer703 Dec 17 '10 at 2:14
    
Bonds and stocks are poor substitutes for each other. Remember that switching to an all-stock asset allocation will make your portfolio substantially riskier. Consider your investment goals. It might be reasonable to substitute some of the long-term bonds for shorter ones or to keep some of that money in cash in the short term, but in the intermediate to long term you should really just be focusing on maintaining a reasonable asset allocation instead of chasing market trends. –  fennec Dec 17 '10 at 3:41
    
What is short term for a bond? < 1 year? –  Victor123 May 3 '11 at 20:53

Yeah, bonds tend to rise when stocks fall, and vice versa.... that's sort of the idea of having both.

Why are the bonds falling in value right now? Interest rates, mostly. When you buy a bond, you're basically buying future money. When you buy a bond, you're signing up for a fixed amount of future money (hence the term "fixed-income" investing). So, if interest rates go up, and there are similar bonds out there with a better interest rate, why would anyone want to buy your bonds? They won't! They can get a better deal elsewhere! ... unless you give them a discount on the face value of the bond. (If interest rates fall, the opposite happens, and the market value of your bond goes up.)

If you have a bond with maturity 1 year away and interest rates rise by 1%, its current value will fall about 1%. If it's maturity is 2 years away, its value will fall by ~2%. (The exact math is a little tricky because it involves compounding.) If you have a bond fund with an average maturity of 5 years, you can expect a haircut of about 5% for every point the interest rate goes up.

As of 2010-and-nearly-2011, interest rates have been insanely low. This is a supply-and-demand situation: people who were scared of the stock market and willing to buy bonds at very bad rates (very good rates for the issuers, though) and the Federal Reserve has been buying them too (well, the Fed mostly buys Treasury bonds, but most lending is basically the going rate for Treasury bonds plus some premium for the risk). Rates can only really go "nowhere" and "up" right now.

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Thanks Fennec. I think the maturity part do not apply to my portfolio, since I can buy/sell more anytime I want. –  Geo Dec 16 '10 at 23:30
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You have bond ETFs, so it's a matter of your fund having the potential to buy and sell these bonds. The prospectus will have information on the maturity target for your bonds. If you look online at the website for, say, CIU, you'll see detailed maturity information: us.ishares.com/product_info/fund/overview/CIU.htm (average maturity of 4.97 years). This maturity of ~5 years is why it's called the iShares Barclays Intermediate Credit Bond fund. –  fennec Dec 17 '10 at 3:33
    
Thanks Fennec, all this leads me to believe that I am very immature when it comes to the market and the options available. I will read more before making any change. Thanks. –  Geo Dec 17 '10 at 13:02

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