Sell Your Bonds: Key Signals to Watch For

Reasons for Selling Bonds

Knowing when to sell bonds can help you protect and maximize your investments. There are three critical signals to watch out for: rising interest rates, signs of issuer instability, and sudden surges in a bond’s market value. Ignoring these changes can reduce your returns or increase your risk, so acting promptly helps safeguard your portfolio. Actively managing bonds, rather than holding them passively until maturity, can make a big difference in achieving your financial goals.

Key Takeaways

Sell bonds when interest rates rise, as newer bonds will offer better rates.
Financial instability or credit downgrades of an issuer signal a time to sell bonds.
A surge in bond market prices can be an opportunity to sell for maximum profit.
Regularly check issuer financials to stay ahead of potential downgrades or defaults.
Use technical indicators to track bond prices and identify optimal selling points.

Rising Interest Rates: When to Consider Selling Bonds

The most significant sell signal in the bond market is an indication that interest rates are about to rise significantly.

The value of bonds on the open market depends largely on the coupon rates of other bonds. An interest rate increase means that current bonds – including the ones you own – will lose value as newer bonds at higher rates become available.

Watch the Fed

Pundits, analysts, and anyone with a social media account speculate about how and when the Federal Reserve will raise rates. If you sell your bonds as soon as someone hints at the word "hike," you may be jumping the gun.

Instead, keep a close eye on announcements after the meetings of the Federal Open Market Committee (FOMC). The FOMC decides on the future of U.S. interest rates at these meetings, so take any definitive announcements from the FOMC seriously.

When the market consensus is that a rate increase is right around the corner, it's time to sell and reinvest the proceeds in higher-paying bonds.

One caveat applies to short-term holdings or those that are near maturity. If your bonds have less than a year until maturity, the interest rate risk is minimal since you've already received most of the coupon payments.

Identifying Issuer Instability: A Signal to Sell Your Bonds

Another good reason to liquidate your bond holdings is financial instability in the company, government, or municipality that issued the bonds.

The appeal of bonds is that they generate guaranteed income. That makes the credibility and solvency of the issuer a primary concern. If your bonds are downgraded by one of the credit agencies or if it even looks like they might be downgraded, it's time to sell. If the issuer declares bankruptcy, you are likely to recover only a portion of your investment.

Check the financials of the companies or governments that issued your bonds regularly and liquidate your holdings before the real trouble starts.

Capitalizing on High Market Prices: Timing Your Bond Sale

Like stock traders, active traders of bonds often look to technical indicators for buy and sell signals. To maximize returns, it is important to have set rules about how much profit you expect and how much of a loss you are willing to take.

Though holding bonds until maturity can be moderately lucrative, you might be able to generate bigger gains by selling when their market value is high, especially if you've held the bond for several years and have benefited from its coupon payments.

By keeping an eye on the average market price of your bond over both short- and long-term periods, you can pinpoint the moments when the price of your bond is highest and sell before it moves back down toward the mean.

Tools for Tracking Bond Prices

Some bond traders use a roll-down return strategy to sell bonds as their price increases. With this strategy, the price usually increases as the bond nears maturity.

Like stock analysis, using an interactive charting tool makes this much easier. Look for moments when the short-term simple moving average (SMA) crosses up through the long-term SMA. This indicates that the current selling price for your bond has been consistently higher in recent days than it has been within your chosen long-term window.

You should always do a cost-benefit analysis before any trade. If the holding period return generated by selling now is equal to or greater than if you held it until maturity, it's time to sell.

How Do I Sell My Bonds?

Most bonds can be bought and sold through online or traditional brokers but others are traded only over-the-counter via broker-dealers who deal in large-volume trades.

U.S. Treasury bonds can be bought electronically through the government site TreasuryDirect.gov but can only be sold by transferring them to a brokerage account. Many banks as well as brokerages sell U.S. bonds but only the government site sells them electronically.

What Happens When I Sell My Bonds?

When you sell bonds on the secondary market, you keep the interest payments you received before the sale. The new owner gets the interest payments from that point until the bond reaches its maturity date.

The price you get for your bonds will reflect the loss of the past payments.

Are Bond Funds a Good Investment?

A bond mutual fund or exchange-traded fund (ETF) is a good alternative if you don't want to dive deep into the world of bond trading. It will give you access to a broader range of bonds than most individual investors could acquire. In fact, some bonds have very high minimum investment levels, putting them out of reach for all but deep-pocketed buyers like mutual funds and pension funds.

The Bottom Line

To make the most of your bond investments, make sure you monitor the key signals for selling, including interest rate changes, issuer instability, and fluctuations in bond values. Bond prices can rise or fall not only because of interest rate shifts but also due to the issuer’s credit health and broader market movements. Keeping an eye on these indicators can help you act strategically, protecting returns and minimizing risks.