When is optimum time to buy into bond funds ?

When would you say is a healthy time to buy into into a bond fund with
the current interest rates? If we are looking at 6% money market rates
maybe in two years, could that be the upper limit? We have not seen
double digit interest rates since '81 I believe.Of course, you get 6%
bond rates and inflation could get out of whack too. And so on and so
on. I am intrigued though about buying into a bond fund and holding for
a while and if rates are cut then selling the fund for some gain. I
like the fixed income idea of a bond fund, do not like the NAV that can
get slammed if rates go up, but do like that bond funds do offer some
steady income. I still have many more years til I retire, so bonds are
not a big part of my portfolio.

Re: When is optimum time to buy into bond funds ?

I recommend starting a bond/CD ladder instead of buying into a bond fund
anytime in the next year or so. The spread between six-month rates and four
year rates is not so great at the moment (maybe 2%, tops), so buying
6-month, 12-month, 1.5 year, 2 year, 2.5 year, 3 year, 3.5 year, and 4 year
CDs should give you a pretty decent yield compared to intermediate term bond
funds, without the risk of losing principal. As each CD matures, buy a new 4
year CD.

Or you could take your ladder out to 5-years, which should increase the
yield a bit more.

Someone can google for exact numbers. I've been watching the rates on these
terms for the last few months and am going from memory.

There's just no telling exactly what interest rates will do. I figure they
will go up somewhat in the next year, but then they may oscillate around a
mean for awhile.

<> wrote
> When would you say is a healthy time to buy into into a bond fund with
> the current interest rates? If we are looking at 6% money market rates
> maybe in two years, could that be the upper limit? We have not seen
> double digit interest rates since '81 I believe.Of course, you get 6%
> bond rates and inflation could get out of whack too. And so on and so
> on. I am intrigued though about buying into a bond fund and holding for
> a while and if rates are cut then selling the fund for some gain. I
> like the fixed income idea of a bond fund, do not like the NAV that can
> get slammed if rates go up, but do like that bond funds do offer some
> steady income. I still have many more years til I retire, so bonds are
> not a big part of my portfolio.

Re: When is optimum time to buy into bond funds ?

Check out investment grade preferreds. Buy them under or at the call price
and you'll do just fine.

Example: FNM-PI (yahoo ticker)
Fannie Mae, 5.375% Non-Cumulative Preferred Stock
Trading at $45.75
Current yield is 5.87%
Rated Aa3
Call date is 10/28/2007.
Call price $50.00




<> wrote in message
news:
> When would you say is a healthy time to buy into into a bond fund with
> the current interest rates? If we are looking at 6% money market rates
> maybe in two years, could that be the upper limit? We have not seen
> double digit interest rates since '81 I believe.Of course, you get 6%
> bond rates and inflation could get out of whack too. And so on and so
> on. I am intrigued though about buying into a bond fund and holding for
> a while and if rates are cut then selling the fund for some gain. I
> like the fixed income idea of a bond fund, do not like the NAV that can
> get slammed if rates go up, but do like that bond funds do offer some
> steady income. I still have many more years til I retire, so bonds are
> not a big part of my portfolio.
>

Re: When is optimum time to buy into bond funds ?

wrote:

> When would you say is a healthy time to buy into into a bond fund with
> the current interest rates? If we are looking at 6% money market rates
> maybe in two years, could that be the upper limit? We have not seen
> double digit interest rates since '81 I believe.Of course, you get 6%
> bond rates and inflation could get out of whack too. And so on and so
> on. I am intrigued though about buying into a bond fund and holding for
> a while and if rates are cut then selling the fund for some gain. I
> like the fixed income idea of a bond fund, do not like the NAV that can
> get slammed if rates go up, but do like that bond funds do offer some
> steady income. I still have many more years til I retire, so bonds are
> not a big part of my portfolio.

A better way to go (though it takes a bit more work) is to purchase
highly rated individual bonds. Unlike a bond fund whose NAV will
decline when interest rates rise, if you hold the bonds to maturity you
will get 100% of your principal back.

One frequently overlooked avenue is so-called "step-up bonds." A
step-up bond starts out with a low interest rate (like a short-term
bond), and the interest rate rises slowly over several years. If
prevailing interest rates rise sharply, the lender has the right to call
the bond. But if not, you get a nice yield.

Freddie Mac often issues step-up bonds.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: When is optimum time to buy into bond funds ?

I must admit I tend to avoid callable bonds like the plague.

They always get called when it is to my disadvantage. I prefer my
fixed income to be, well, fixed ;-).