The Federal Reserve has raised short-term interest rates throughout 2005 and there is no sign the Fed will cease this tighter-money policy any time soon. Eventually, long-term interest rates may head north, too, which would be bad news for bondholders because rising rates devalue existing bonds and bond funds
Thus, we might be at the end of a 25-year bull market in bonds. Investors may want to avoid long-term corporate and Treasury bonds because that’s where the interest-rate risk is the greatest.
To survive in this environment, bond investors can ladder maturities to reduce interest-rate risk. That is, investors might hold some bonds maturing in 2006, some in 2007, some in 2008, etc. When each bond comes due, the proceeds can be used, if cash is needed, or reinvested in a longer-term bond. Therefore, if interest rates rise, investors can keep reinvesting at higher yields.
