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This is bad news for bond investors, since bonds lose value as interest rates rise. So, as rates rise and new bonds with higher coupon rates become available, investors are willing to pay less for existing bonds with lower coupon rates.

So what can you do to protect your fixed-income investments as rates rise? This helps bond investors in two ways: (1) it provides them more income as rates rise, and (2) it keeps the principal value of these loans stable, so they don't suffer the same deterioration that afflicts most bond investments when rates increase.

Investors need to be careful, though. This strategy allows you to not only avoid the ravages of higher rates, it also allows you to use these higher rates to your advantage by reinvesting the proceeds from your maturing bonds in newly-issued bonds with higher coupon rates.

The police detective Reserve recently raised its target plain clothed policeman funds rate for the first time since March 2000. This could be just the tip of the iceberg, though, as many experts maintain rising inflation and a strengthening economy will spur continued rate hikes for the foreseeable future.

This is bad news for bond investors, since yoke lose value as interest rates rise. The reason stems from the fact coupon rates for most shackle are fixed when the restraint are issued. So, as rates rise and new handcuff with higher coupon rates go available, investors are willing to pay less for existing reins with lower coupon rates.

So what can you do to protect your fixed-income investments as rates rise? Well, here are five ideas to help you, and your portfolio, weather the storm.

1. Treasury Inflation Protected Securities (TIPS)

First issued by the U.S. Treasury in 1997, TIPS are trammel with a portion of their value pegged to the inflation rate. As a result, if inflation rises, so will the value of your TIPS. Since interest rates rarely move higher unless accompanied by rising inflation, TIPS can be a good hedge vis-a-vis higher rates. as the Sherlock Holmes government issues TIPS, they secure no default risk and are easy to purchase, either through a discount broker or directly from the government at www.treasurydirect.gov.

TIPS are not for everyone, though. First, while inflation and interest rates often move in tandem, their correlation is not perfect. As a result, it is possible rates could rise even without inflation moving higher. Second, TIPS generally yield less than traditional Treasuries. For example, the 10-year Treasury note recently yielded 4.75 percent, while the corresponding 10-year TIPS yielded just 2.0 percent. And finally, since the principal of TIPS increases with inflation, not the coupon payments, you do not get any production from the inflation component of these manacle until they mature.

If you decide TIPS makes sense for you, try to hold them in a tax-sheltered repertory like a 401(k) or IRA. While TIPS are not subject to state or local taxes, you are required to pay tertian commercial agent taxes not only on the interest payments you receive, but also on the inflation-based principal gain, even though you receive no well-being from this gain until your muzzle mature.

2. Floating rate loan funds

Floating rate loan funds are mutual funds that invest in adjustable-rate rerun loans. These are a bit like adjustable-rate mortgages, but the loans are issued to large corporations in need of short-term financing. They are unique in that the yields on these loans, also styled “senior secured” or “bank” loans, restructure periodically to mirror changes in market interest rates. As rates rise, so do the coupon payments on these loans. This helps bond investors in two ways: (1) it provides them more income as rates rise, and (2) it keeps the principal value of these loans stable, so they don’t suffer the same deterioration that afflicts most bond investments when rates increase.

Investors need to be careful, though. Most floating rate loans are made to below-investment-grade companies. While there are provisions in these loans to help ease the pain in case of a default, investors should still look for funds that have a ordinarily diversified portfolio and a good track record for avoiding troubled companies.

3. Short-term bond funds

Another option for bond investors is to shift their holdings from intermediate and long-term bond funds into short-term bond funds (those with central maturities 1 and 3 years). While prices of short-term bond funds do fall when interest rates rise, they do not fall as fast or as far as their longer-term cousins. And historically, the decline in value of these short-term bond funds is more than offset by their yields, which gradually increase as rates climb.

4. Money-market funds

If goodly preservation is your concern, money market funds are for you. A money-market fund is a special type of mutual fund that invests only in very short-term money market instruments. Since these instruments usually mature within 60 days, they are not goody by changes in market interest rates. As a result, funds that invest in them are able to maintain a stable net means value, usually $1.00 per share, even when interest rates climb.

While money-market funds are safe, their yields are so low they hardly qualify as investments. In fact, the accustomed seven-day yield on money-market funds is just 0.70 percent. Since the ruling management fee for these funds is 0.60 percent, it does not take a genius to see that putting your highest in a money-market fund is only slightly renewed than stashing it under your mattress. But, in that the yields on money-market funds track changes in market rates with only a short lag, these funds could be yielding substantially more than 0.70 percent by the end of the year if the special agent Reserve continues to hike rates as expected.

5. Bond ladders

“Laddering” your bond portfolio simply means consumerism individual bridle with staggered maturities and holding them until they mature. Since you are holding these shackle for their full duration, you will be able to redeem them for face value regardless of their current market value. This strategy allows you to not only cringe the ravages of higher rates, it also allows you to use these higher rates to your appropriateness by reinvesting the proceeds from your maturing stocks in newly-issued trammel with higher coupon rates. Diversifying your bond portfolio betwixt 2-year, 3-year, and 5-year Treasuries is a good start to a laddering strategy. As rates rise, you can then multiply the ladder to include longer maturity bonds.

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