Sunday, September 18, 2011

Don't panic on treasuries, but corporates need fixing

The recent Shifting Bond Maturities and My Latest Mistake post by Mike at Oblivious Investor got me thinking about bonds.  When you're holding bonds, you shouldn't really worry about rising interest rates that much.  Sure, their value would fall, but you would rebalance, buying more bonds, and you would end up holding your older bonds to maturity.  No big loss - the older bonds will approach par value as they near maturity.  The new bonds that you're buying will be yielding more, so you end up doing fine as explained by a Vanguard research paper.  So I agree with Mike - stick with your intermediate term bonds, and don't worry too much about it.

When we get out of treasuries and into corporates, we face a lot more issues.  Among them are that the indexes overweight high levels of debt as Matt Hougan points out on IndexUniverse.  It seems to me that there are some simple tweaks that could be used to improve the indexes.  If we assume that the market is somewhat intelligent and demands a higher yield for a good reason, why not just divide issue size by the current yield-to-maturity?

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