Profiting from the Bond Bubble

Over the past two years, our bond investments have done very well. From 2006 to 2008, I purchased a significant number of bonds paying interest rates of 4-5%, with the intent of holding all of them to maturity. As interest rates have declined, the value of the bonds have increased by 4-5% and as much as 12% in one case.

At first, I was glad the bonds we owned paid 4-5% each year and increased in value by 4-5% since being purchased. It has been one of the few bright spots in our investment portfolio. Lately, I've been thinking that results are not sustainable, and that this may be a bond bubble. After all, these great returns are the result of the low interest rates courtesy of the Fed and a flight to safe investments. Bond values would decline significantly if the Fed raises rates or investors move out of bonds.

Since I expect interest rates to rise longer term, our bond values are at risk of falling. Fortunately, most of our bond maturities are under 3 years making the bond market risk relatively low. We could always wait for the bond to mature and recover 100% of the principal. However, since I believe the current level of interest rates is unsustainable, it makes sense to sell the bonds and take the profits. After all, there is a high probability the price of the bonds will decline in the future.

As it turns out, selling bonds is not quite as easy as selling stocks. First, I need to have a bond specialist get quotes from the market makers. If I agree to the quote, the bond is sold at that price. Tomorrow, I will find out what the market makers are willing to pay. If the price allows me to make a 3-5% profit, I will sell and hopefully miss the bursting of a bond bubble.

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This is not financial or investing advice. Please consult a professional advisor.

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