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Retirement Portfolios: Fears over Rising Rates are Overblown

July 9th, 2013

by Joe Tomlinson

The second quarter saw increases in interest rates, losses in every category of bonds and investors abandoning fixed-income markets. The distress has been particularly acute among retirement investors who considered bond funds to be safe. But are fears of bond losses overblown? I will make the case that the rise in interest rates is actually good for retirement portfolios. To see this, one has to look beyond the quarterly statement losses and focus on overall retirement outcomes.

Damage assessment

The 10-year Treasury yield rose from 1.87% to 2.5% during the second quarter. Most of the increase occurred after mid-May, when Federal Reserve Chairman Ben Bernanke mentioned moderating the Fed stimulus. The Merrill Lynch U.S. Broad Market Bond Index dropped 3.5% in the May-June period. As reported by TrimTabs, investors responded by pulling a record $43.4 billion out of bond mutual funds and bond exchange-traded funds in June.

This chart provides recent performance details for six of the largest bonds funds:

Six Large Bond Funds

Fund

Symbol

Assets $Billions

Second Quarter 2013 Return

Duration Years

PIMCO Total Return

PTTRX

$268

-3.60%

4.73

Vanguard Total Bond Market Index

VBMFX

$115

-2.45%

5.31

Templeton Global Bond

TPINX

$73

-2.78%

1.59

DoubleLine Total Return Bond Fund

DBLTX

$39

-1.59%

2.94

Vanguard Inflation-Protected Securities

VIPSX

$35

-7.34%

8.31

American Funds--Bond Fund of America

ABNDX

$32

-2.65%

4.55

Source: Morningstar®

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