It recently occurred to me that there may be some people out there who are wondering what to do with their current bond portfolio considering that yields are much higher now.
In 2021, the vast majority of newly purchased corporate bonds were only yielding around 1% to 2% per year. Government bonds were also about the same.
From 2022 to 2023, the Fed increased interest rates at an unprecedented pace. The federal funds rate was increased eleven times going from 0.08% to 5.33%; the fastest rate in history. As a result, today you can purchase corporate and government bonds yielding 5% to 7% per year depending on maturity and credit quality.
Based on this, should you sell your low yielding bonds to purchase higher yielding ones?
The answer is that it doesn’t matter!
When the fed raised rates, your low yielding bonds fell in value. That’s how bonds work. As interest rates increase, bond prices fall in value.
If someone were to buy your bond, they would be getting a discount. These mechanics essentially increase the yield on your bonds to make them equivalent to purchasing a bond at a higher yield.
So, it would make zero sense to sell your bonds to purchase new ones in an effort to make more yield. The yield doesn’t change!
Now it may make sense to sell your bonds in an effort to take advantage of losses (i.e. tax loss harvesting) or to replace your bonds with a better overall strategy. But it doesn’t make sense for the sake of yield.
If you’d like to receive financial tips on a periodic basis, then click here to sign up. You can always unsubscribe at any time.
Brad Tinnon
CERTIFIED FINANCIAL PLANNER™
Photo by Karim MANJRA on Unsplash