SELL YOUR BOND HOLDINGS - NOW
When the going gets tough, sell your bonds. Here’s why.
This is the most apparent and important sell signal: when interest rates are slated to increase significantly. As of present, officials from the Federal Reserve, the European Central Bank, and other major central banks point to rate liftoff. In case of a rate hike, the current bonds will likely lose value since it hugely depends on the coupon rates of other bonds. Newer bonds with higher coupon rates reflect the rate hike. Therefore, to recompense new buyers for almost lower interest payments, the market prices of older bonds with lower coupons will decline.
For interest rate announcements in the United States, rely on the Federal Open Market Committee as it determines the course of monetary policy. On the other hand, when a market hints at a prospective rate increase, sell unless you are holding these derivatives until maturity. A warning, though: if you hold bonds or other securities with maturity of less than a year, there is a small chance of rate risk as the return on investment is near and the coupon payments have been exhausted.
Here’s another reason to ditch the bonds: unusually high market price. Those who trade bonds actively often refer to technical indicators for buy and sell signals. To optimize returns, set profit and loss projections. Although holding bonds is somewhat a good choice, you can gain better by selling when the market value is high.
Monitor the bond’s average market price over short- and long-term periods in order to determine when the price is highest and sell before it moves back down toward the mean. To make this easier, utilize an interactive charting tool. Look also for times when the short-term simple moving average crosses up through the long-term SMA.
If the issuing entity suddenly becomes financially troubled or entangled in legal disputes, or sustains substantial losses that affect its profitability, liquidate the bond holdings. This derivative is known for generating steady income, so the firm’s credibility and solvency is of utmost importance. But if the bond comes from the government or corporation that declares bankruptcy, you will likely recover a part of your investment.
In other words, if the institution seems like heading for a downward spiral, sell the bonds. While you can recuperate a portion of your capital in the event of a default, it is advisable to liquidate your bonds and reinvest the money in a safer instrument.
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