Because stable value funds invest in intermediate-term bonds
, and money market funds favor short-term bonds, the recent rise in short-term interest rates has been creating some challenges for stable value.
Bond allocations, which had bottomed out in 2015 on the prospect of higher interest rates, ticked up 3% in the second quarter, to 30% from 27% of holdings.Exposure to intermediate-term bonds
rose to 11%, or about 36% of the typical bond portfolio, in the expectation that interest rates would remain low.
Shifting the bond allocation to long bonds would increase the risk of such a large loss to 39%, because long-term bonds lose more value than intermediate-term bonds
when interest rates rise.
Most of this went into long- and intermediate-term bonds
This fund holds mainly various short- and intermediate-term bonds
, often backed by insurance company guarantees.
According to a study by Ibbotson Associates, an investor starting in 1972 to withdraw at a rate of 9% a year from a portfolio of 60% large-company stocks and 40% intermediate-term bonds
would have gone broke in 1981.
Many advisers generally recommend short- to intermediate-term bonds
or bond funds so the portfolio doesn't sustain too much damage if interest rates rise.
Remember the basic rule of thumb: if you are going to need the money in the short term (to pay upcoming college tuition, for example), consider investments such as short-term Treasuries, intermediate-term bonds
and cash equivalents like CDs and money market accounts.
For intermediate-term bonds
(typically two-year to 10-year maturities), the interest rate is normally higher than a shorter-term bond and lower than a long-term bond.
The Tedfords' fixed income performance tract record in intermediate-term bonds
-- those maturing in one to 10 years -- was ranked third in the Piper Domestic Intermediate Duration Managed Fixed Income performance evaluation report over the past five years.
* Intermediate-term bonds
. These are debt obligations with maturities between 1 year and 10 years issued by corporations, governments, federal agencies, and other borrowers.
Also look for pre-funded municipals, short- to intermediate-term bonds
backed by Treasury securities.