Short- vs Medium- vs Long-Term Bonds

How should we choose whether to go with short-, medium- or long-term bonds? It all depends on the portfolio's goals. For instance, if the portfolio is seeking moderate growth and price appreciation, most likely, the medium-term bonds will be chosen. If the portfolio wants to preserve its capital, most likely short-term bonds would be chosen. Key barometers for gauging bonds are inflation, prevailing interest rates and duration. When you are deciding what maturity of bonds to select, here are some key factors:

Interest Rate Changes

If there are going to be volatile interest rate changes, this means the central bank will be lowering or raising interest rates on an ongoing basis. It is best to stay away from long-term bonds unless it is almost certain that the central bank will be continuing a cycle of lowering the interest rates. In that case, long-term bonds would be most favorable.

Reinvestment Risk

Shorter maturity bonds will carry reinvestment risk. Therefore, be cautious to the overall duration of your bond portfolio.

Interest Rate Environment

If interest rates have hit a cyclical high, then it is time to lock in high coupon rates with longer-term bonds. The opposite is true for low-interest-rate environments.

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