The real risk of rising interest rates

More than three years ago, the bond “king,” PIMCO’s Bill Gross, announced that the world’s biggest bond fund had reduced its U.S. government-related debt holdings from 22 percent in December 2010 to just 12 percent in January 2011, at that time its lowest level in two years. Shortly thereafter, PIMCO announced it had entirely eliminated government-related debt from its flagship fund because bond yields had reached unsustainably low levels given the scale of government debt obligations and the likelihood of an interest rate correction when the Federal Reserve ended its quantitative easing program.

Over the years since then, so-called experts have persistently bombarded investors with warnings that interest rates were sure to rise. These experts advised investors to keep any bond holdings to only the very shortest term. Unfortunately, investors who heeded such warnings lost a valuable opportunity to earn term premiums over a period where the yield curve has been fairly steep. In fact, interest rates are currently lower than they have been throughout most of the period following Gross’ pronouncements.

Read the rest of the article on CBS MoneyWatch.

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