PP LT Bond Allocation

[JMoyle]

With unprecedented Fed bond buying and the inevitable coming rise in interest rates, would it be an acceptable option to move from a passive LT bond index fund like TLT to a more actively managed bond fund like SUBYX to better cope with the coming Bond Bear Market?

[ns2]

I only understand the PP principles well enough to predict that the answer from the experts here will be no, but I will be interested in the answer to your question myself.

[buddtholomew]

Are you referring to the inevitable rise in interest rates that the investing community has been talking about over the last 5 years? Timing the bond market is as fruitless as timing the equity market or any other market for that matter. The allocation to cash lowers the overall duration of the fixed income portion of the portfolio.

[Alanw]

Are you referring to the inevitable rise in interest rates that the investing community has been talking about over the last 5 years? Timing the bond market is as fruitless as timing the equity market or any other market for that matter. The allocation to cash lowers the overall duration of the fixed income portion of the portfolio.

Budd, very well put.  I have posted before about yield spread premium. That is, how high can long term rates go when short term rates are at zero?  With the Fed determined  to keep short rates at zero and taper bond buying, what will be the impact on LTT's ?  Will LTT rates continue to rise or will they stabilize as Taper continues?  Won't money eventually come out of cash and go into LTT's as their yield approaches 5%, 6%......?  It is quite confusing with the Fed announcing the beginning of Taper yet a continuing zero short term rate policy well into the future.  My best guess is that the Fed is still quite fearful of deflation which would be good for LTT's.  So once again, how large of a yield spread premium can we expect before something gives?  Any thoughts?