If one wants to buy a fixed income investment, then make sure to stick to a term of one year. If one wishes to purchase longer, do not exceed a term more than two years.  Most bond yields currently result in losses after taxes and inflation.  This loss will be exacerbated once the price of fixed income assets decline in value with a rise in interest rates. 

Let us explain.  Assume, back in the good old days you purchased the average 5-year bond trading at par ($1000) that paid you 7%.  That’s a decent return so you go and brag to your annoying neighbor Joe.  Filled with envy, he too decides he wants to invest in some.  The next day you wake up and there is a little bit of turmoil in the Middle East and the bond market reacted by pushing up interest rates premarket.  Joe can still get your bond, but cheaper and it now pays 8% (see chart).  He happily buys some. 

You hear his gate slam and you know he is on his way over to rub it in your face that he received a 15% higher rate of interest than you.  Just when you were wishing he would keep his mouth shut, he is quick to add that he was able to buy it at $875 which means he will receive an additional 15% on his dollar when the bond matures.  He raises his hand for a high-five and you bitterly participate.

As he turns away to walk home, you’re not only kicking yourself for bragging to  Joe the day before, but you’re hoping that you do not need a few quick bucks soon because if you do you will be forced to sell your bond at a 12.5% capital loss.  Even if you’re not forced to sell, you will still be slapped with opportunity cost and the fact that Joe has smug rights on you. 

As Joe found out, there is too much risk in buying longer-term fixed income securities when interest rates have bottomed.  In ordinary times it is difficult to accurately predict when interest rates are in a trough, but today it is a no brainer because they are at historical lows and cannot fall much further.  Furthermore, it is hard enough to guess what is going to happen next year, let alone 10 years from now.