The slope of the yield curve can be measured in varying ways but is conventionally thought of as the long-term government bond rate minus the short-term government bond rate.
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Consider alternative investments for your intermediate-term goals like short-term bond funds, municipal bond funds or income funds that include dividend-paying stocks in the mix but watch for bonds with long maturities.
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If you own bond funds, you can either opt for funds with shorter durations or create a fund barbell by mixing long-term and short-term bond funds.
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In the second scenario, a sudden jump in interest rates, short-term and medium-term bond funds take an immediate hit in their value and then take about two years or more to climb back to their starting value.
However, the model also suggests that, if lower interest rates are to revive the economy, a cut of 2.5 percentage points (the size of the cut until this week) would normally be expected to have lifted share prices by 22% within a year, reduced long-term bond yields by three-quarters of a point, and left the dollar 5% weaker.
The 30-year-plus bond bull market is reflected by this long-term chart of T-Bond yields by year-they have declined from 15.2% to 2.91%!
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There are people who will reach for yield either by going to a high-yield bond fund or maybe a long-term bond, but those, for me, pose a little bit too much risk.
Vanguard Long-Term Government Bond ETF ( VGLT) seeks to provide a diversified exposure to the long-term U.S. government bond market.
The story is similar with its top bond fund, the Virtus Multi-Sector Short Term Bond Fund, run by Virtus-owned money manager Newfleet Asset Management.
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And by putting downward pressure on long-term bond yields, it may require the Fed to raise short-term interest rates more aggressively to cool down the economy.
To reduce interest-rate and default risk, Ms. Benz suggests sticking with intermediate-term muni-bond funds with a high percentage of their holdings in general-obligation bonds, which are repaid with tax revenue.
Yale's Spiegel recommends intermediate-term corporate bond funds in tax-favored savings accounts.
In that case, there will be much talk of the Japan syndrome, and it is conceivable that medium-term bond yields will drop into the 1-2% range.
Nor is it just the threat of higher short-term rates and inflationary pressures in America that is driving long-term bond yields higher.
And stick to shorter-term bond funds that have less sensitivity to interest-rate changes.
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Uncertainty over the timeline for a resolution in Europe and falling levels in the stock market have also helped drive investors into safe-haven assets like U.S. Treasuries, which has left the 10-year bond today yielding 2.11% and the 30-year long-term bond yielding 3.13%.
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With any long-term bond the investor is at the mercy of interest-rate fluctuations.
In the event the ratings agency cut Greek long-term bond ratings by two notches to B from BB- and said that the outlook may bring a further weakening.
For traders, says Mr Jarnefelt, "information is everything" though as long-term investments, bond prices are particularly sensitive to events with long-term impacts.
The rise in medium- and long-term government-bond rates has already taken many by surprise and has led to howls of protest from politicians.
College-savings professionals recommend money-market and short-term-bond funds.
The only options for investors were to buy contra funds or strategically shift to holding bond funds, particularly long-term government bond funds.
This is not a problem if you hold a bond to maturity (unless you recently bought a newly issued long-term bond), but it will adversely impact bond fund prices.
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Other than parking cash for a few years in short-term bond index funds to beat money markets, lazier investors might do better with actively managed broad-spectrum bond funds.
This is a weighted average of short-term interest rates, corporate-bond yields, share prices and the trade-weighted dollar, with the weights derived from the Fed's model.
Two ideas are on the table: commit to keep short-term interest rates near zero for even longer than through mid-2013, and restart a bond-buying program aimed at driving already-low long-term interest rates lower.
What if you are buying a short- to intermediate-term bond fund, not the bond itself?
This is the argument for replacing the promissory notes with a very long-term bond.
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The long-term bond market is also very accommodating today for companies that do not have leveraged balance sheets.
It is long-term bond yields, and the mortgage rates allied to them, that give the economy its tempo.
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