As of this writing, 10-year Treasury bonds yield around 1.7%, which is near historic lows. Most experts believe that interest rates won’t be this low in 2022. That’s true for other types of bonds as well as Treasuries.
If you buy 10-year bonds now, and interest rates rise in the next decade, two things can happen.
* You’ll sell your bonds prematurely. When interest rates rise, bond prices fall. Thus, if you buy a 10-year bond now and sell after interest rates rise, you’ll take a loss.
* You’ll hold on until maturity. In that case, you’ll get your money back, without a loss. However, you’ll be receiving a 1.7% return all these years, while other investors are getting 2% or 3% or more on money they invested in bonds while you were holding on.
The problem isn’t limited to individual bonds. If you buy a bond fund, its share value is likely to fall if interest rates rise. Again, you could lose money.
The safest solution is to buy short- and intermediate-term bonds and bond funds. You’ll earn less than 1% now with two- and five-year Treasuries. However, you’ll be in a position to profit when rates rise because you can take the money from maturing bonds and reinvest as yields move higher.
