Expert: Doug Ingram - 1/14/2003

Question
If deficits DO matter and we face a sustained rise in interest rates of 1-2%, should I continue to hold my  positions in Vanguard GNMA and TIPS funds, or bail out now into something of shorter duration for total return.
I'm 62, retired, don't need CURRENT income, but this accounts for the bulk of my fixed income portfolio. I expect to start drawing out at least the interest in two years.

Answer
My favorite funds have been total return bond funds.  The TIPS are good if you expect inflation.  Although there is a slight uptick in inflation, deflation is a worldwide concern.  The shorter duration gets you nothing right now, but it does protect your cash.
We expect further weakness in stocks and interest rates to drop even further.  Sometime this year, there should be a very tradeable bottom in stocks.  At that time, we would switch to stocks and shorten bond duration.  (That would also be the time for TIPS.)
I personally would not be favoring GNMA or TIP funds at this moment.  It also depends on how long you hold funds.  We are planning to buy longer duration towards the end of January and then switch to short duration and long stocks later this year.