Is This the ‘Big One’?

Bond yields are jumping, and if you own long-term bonds or the mutual funds that invest in them, start paying attention if you haven’t already.

The yield on the 10-year Treasury hit 2.2 percent on Friday. That’s the highest in more than a year and marks a sharp rise, from the 1.6 percent neighborhood, in about six weeks’ time.

When yields rise, the value of bonds (and bond fund shares) fall. The longer the so-called duration of your holdings, the more the value declines. (In other words, all things being equal, a portfolio packed with two-year Treasuries will lose less as rates move up than one loaded with 10-year notes.)

Now, there have been a lot of twitches in bond yields over the past few years, up and down. But for the most part, the yield on the benchmark 10-year Treasury has stayed below 2 percent since late 2011. That’s largely because the Federal Reserve has been buying bonds, pushing yields down and prices up.

But now that there’s increasing speculation the Fed may taper off its bond buys, rates are rising. And on Friday Goldman Sachs put a stake in the ground.

In a research note titled “The bond sell-off: it’s for real,” Goldman basically declared that the earlier upward moves in bond yields were head fakes. But this one, they said, will stick. Said Goldman: “Our end-2013 forecast for 10-year US Treasuries remains 2.5%.” The big bank said it will look to trade the market from the short side for the remainder of the year.

For investors like you, it’s time to examine your fixed-income holdings, whether in funds, ETFs or individual securities, and make sure you’re comfortable with them. Bonds have basically been in a bull market for years.

“There are lots of investors who hold bonds,” said Jim McCaughan of Principal Global Investors on CNBC Friday. They “have done very well over the last ten years by having long duration. When rates go up, those funds are going to get hit.”

McCaughan warned, “Anyone who has too many bonds with too much duration is going to hurt.”

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