How Risky Are Bonds?


Reader’s Question: In a recent column you commented that bond holdings may face trouble ahead. Given the diversity of different types of bonds (muni’s, treasuries, corporate bonds, international bonds, long bonds, short bonds, etc.) your advice seemed over-generalized. Are you suggesting all bonds are headed for trouble? Could you be more specific? K.Z.
Answer:   Bonds values move inversely with interest rates. As interest rates move up, bonds that you currently hold will decrease in value and vice versa. This is true for all bonds. Bond yields are currently at historical lows with the 10-year U.S. Treasury yielding about 1.65% versus long-term average yields of about 6.5%. While interest rates could fall further and cause a bit of a bond rally, I believe the next big move in interest rates is higher, perhaps much higher, and that spells trouble for all bonds. Bonds of the highest quality and shortest maturities are the least at risk. One possible exception is TIPS bonds whose interest rates are tied to inflation. If interest rates begin to move up rapidly you’re likely to also see much higher inflation and TIPS bonds could benefit. It is also possible that U.S. interest rates will rise while interest rates for non-U.S. countries remain stable or fall but that is unlikely. 
So what’s a person to do? For more conservative investors, I’d recommend sticking with higher quality-shorter term bonds (under 3-year maturities) and realize that for this portion of your portfolio, you are focusing on the return of your money more than the return on your money. Over the next 3-5 years, I believe one of the best opportunities for return ‘on your money’ will come from U.S. blue chip dividend-paying stocks.
Reader’s Question: I’m the beneficiary of my husband’s IRA. If he dies before age 70½ can I just leave the funds there but change it to my name and add a beneficiary? I assume that I will have to begin drawing from those funds when I reach 70½, correct?
If he dies after reaching 70½ and was drawing funds from his IRA, do I have to continue doing so or can I wait until I reach age 70½ to begin drawing funds in my name? S.Q.
Answer: What you are referring to are ‘Required Minimum Distributions’ or RMDs where the federal government requires that a retirement account owner must begin making withdrawals by April 1st of the year following the year he or she turns age 70 ½. The amount of the minimum withdrawal is based on life expectancy (expressed as a percentage) for a male or female but typically begins at around 3.5% and grows each year as life expectancy declines. If your husband dies before beginning RMDs, you can roll over his account into your own IRA account and postpone taking any distributions until your RMD date (known as your Required Beginning Date or RBD). If, on the other hand, he has already begun taking RMDs, you must first withdraw the full amount he would have taken in the year of death then you have the option to roll over the account to your IRA and postpone withdrawals until your required beginning date.  This is the option most surviving spouses choose but you do have other options so you should consult your professional advisor before making your final decision.