Significant Fixed Income Losses

My bonds and bond funds have declined significantly over the past month, due to interest rates increasing.  Some of my bonds, specifically 20 year Treasuries, are down as much as 14% since their purchase in 2023, when interest rates started increasing.  Many are down 4-8%.

Here's why I am not worried...yet:

• Other than 1% bonds that are maturing in the next two months, out taxable bonds pay an minimum of 3.75%, with over 90% paying 4-5% for 3- 20 years.  I will get paid this amount for up to 20 years, no matter what future interest rates are.  
• Historically, 5% is a good interest rate for long term bonds.
• I am getting sufficient income to support our "retirement paycheck" strategy, which is giving us a monthly payment for our retirement expenses.
• I am holding the bonds until maturity, which means I receive the par value and losses go to 0% or may even be a small gain.
• For bond funds, which are primarily muni bond funds in taxable account, I can do tax loss harvesting to offset stock gains, and rebuy the bond fund at a lower price.
• Finally, I have cash in money market funds or treasury bonds (1 year less Treasuries), which will pay more if interest rates go up.  About 40% of our investable funds are in this category

Here's what would could go wrong:

• Long term interest rates could go up significantly.  In 1981, the 10 and 20 year Treasuries yield as much as 15.8%.  
• Inflation could go up significantly to double digits.
• The U.S. could default.

Right now, the probability of what could go wrong is still very low, less than 1%.  However, the probability continues to increase as the U.S. deficit increases, the wars continue, and inflation continues to rise.

For more on The Practice of Personal Finance, check back every  Wednesday for a new segment.

This is not financial, fixed income, inflation, nor policy advice. Please consult a professional advisor.

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