No. of Recommendations: 3
Seems to me the question you pose is a classic bond investors dilimma. When interest rates fall, you have paper profits and at times that means the profits you have made to this point give you far more than you expected to this point, but if you hold the bond from here to maturity, in the latter portion you will get lower effective yield, maybe much lower.

Similarly, if you sell the bond now and reinvest in new bonds, you will give back those profits whenever interest rates eventually rise.

Assuming you can sell them at reasonable broker fees, you can consider selling them. To avoid the rising interest rate exposure, I would think the logical move would be to put the money in money markets (or interest rate insensitive investments like what ?? real estate?), hold until interest rates rise, and then buy back in. The lower rates of return of money markets give you a good idea how long you can hold this position. I would bet in the present economy, probably not long enough.

The larger question is how does a fixed income investor make money when interest rates are rising? Can you invest in interest rate futures? Can you sell bonds short? What else is out there?
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