Best Bonds For a Rising Interest Rate Environment

The Best Bond Funds to Buy When Interest Rates Are Expected to Go Up

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Finding the best fond funds to buy for rising interest rates begins with monitoring the actions and words of the Federal Reserve. In 2019, the Fed has signaled that it will pause its campaign of raising rates but may continue tightening in 2020. Here are some general guidelines for buying bond funds now and in the coming year.

Best Bond Funds For Rising Interest Rates

One way to invest in bond funds during rising interest rates is to use short-term bond funds. Generally speaking, bonds with longer maturities fall further in price than those with shorter maturities. So by using bond mutual funds with shorter average maturities, you can minimize the negative effect of falling prices. In this case, investors can consider short-term bond funds.

Another way to manage uncertainty in rising interest rate environments is to use a well-diversified and well-managed bond mutual fund. One such fund is Loomis Sayles Bond (LSBRX). Manager Dan Fuss has been has 55 years of experience in the investment industry and has been with Loomis,Sayles & Company since 1976.

In summary, the best bond funds for rising interest rates can be either short-term bond funds or broadly diversified funds, such as a multi-sector bond fund or a total bond market index fund.

How to Know When to Sell Bond Funds

It's important to understand that bond funds can lose money, which is to say that prices of bonds can fall, especially when interest rates are expected to rise. If bond funds are expected to fall in price in 2019, you may be tempted to sell your bond funds and shift assets to cash. However, it's also important to invest for your time horizon.

If you need your money within one year, now may not be the best time to hold bond funds because there may be equal chance of losing value or gaining value on your bond fund. However, if you have a time horizon of at least three years, chances are that bond funds will outperform cash.

Also, if you are dollar-cost averaging into bond funds, you are buying shares at lower prices, assuming they fall, and this can be a good strategy for a long-term investor. When the prices begin to rise again, your "average" share price is lower and thus you benefit more when they bounce back.

Outlook for Bond Funds in 2019 and 2020

Here's the bottom line for buying the best bond funds in 2019 and beyond: If you want to minimize risk first and maximize returns second, which is a wise investment philosophy, you will not completely abandon your long-term outlook but simply remain diversified. A good bond mutual fund to remain diversified is Vanguard Total Bond Market Index (VBMFX).

Additionally, who's to say the economy won't slow down again and bonds hold on to their values or even go up in price as stocks have low to negative returns? No one really knows. This is why the buy-and-hold strategy tends to work best for most investors.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.