For the last few years there has been an inner voice telling bondholders "rates have nowhere to go but up." That's why skittish fixed-income investors stampeded into adjustable-rate-bond funds last spring when interest rates bumped up. But there is a smarter strategy than selling in panic or merely sitting on the sidelines. You want bonds with moving parts. What are they? They're bonds that have some feature that adjusts with rates or resets at some future point in time. Examples are bonds whose yield changes with the slope of the yield curve, Libor-based bonds and bonds whose coupons adjust to a specific Treasury yield. Allocate 10% to 15% of your portfolio to them-and no more. They're all from financial institutions, and too much exposure to any sector is never a good thing.
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