One word has sent fear screaming back into the markets- taper.




To get any sort of real yield in the current low rate environment, investors have been forced to go out on the maturity ladder and into longer-dated bond funds like the iShares Barclays 7-10 Year Treasury (NYSE:IEF ). However, as the Federal Reserve has now begun seriously talking about ending its QE program and raising rates, investors in these longer dated bond funds could see some serious capital losses. Income seekers are certainly in a tight spot.




Luckily, there’s plenty of ways to get higher yields and interest rate protection.



A Big Issue


While deep-down the Fed’s impending actions are actually a good thing- meaning he economy is finally moving in the right direction- they can cause some unpleasant side effects for fixed income seekers. Bond prices are inversely correlated with the direction of interest rates. As the Fed raises rates, a portfolio of fixed-income securities will likely lose value. Bonds with longer maturities suffer more. The longer the maturity of the bond, the bigger the swing in prices.




For example, every percentage point gain in yield, a 10-year bond would lose roughly 10% in price, meanwhile a 30-year bond would drop around 30%. Those are some hefty losses for what many investors consider safe-haven investments. With cash, CDs and short-term investment funds like the PIMCO Enhanced Short Maturity ETF (NASDAQ:MINT ) paying next to nothing, investors looking to fund their liabilities today are facing a quandary.




However, there are some ways to help insulate a portfolio from rising interest rates. Investor’s first can look for bonds that have above-average yields and below-average durations. Duration is a way to measure debt issues’ price sensitivity to interest-rate movements. By using the duration metric, investors are able to compare bonds across a variety of maturities and coupons. In addition, bonds with higher yields are generally less affected by movements in short-term interest rates.



Adding the Protection


The first option that help mitigate interest rate risk could be the simplest- focus on short term bonds. Funds with durations of three years and less remain fairly stable when interest rates rise, and they offer a relatively safe haven during volatile times in the bond market.




A prime portfolio pick could be the Vanguard Short-Term Bond ETF (NYSE:BSV ). The exchange traded fund (ETF) invests in U.S. government bonds as well as investment-grade corporate and international dollar-denominated bonds. Overall, the funds 1630 holdings creates a duration of only 2.7 years and yield of 0.61%. As rates rise, the fund should have a much easier time rolling over its portfolios into higher yielding issues. That makes it a great core option for bond investors.




A potential way to add some more oomph to that 0.61% yield could be by moving out on the credit spectrum. Strictly focusing on corporate debt could land a bigger dividend check each month. The SPDR Barclays Capital Short Term Corporate Bond (NASDAQ:SCPB ) tracks investment grade bonds with an average maturity of 2 years. That focus on corporates boosts the yield to 1.53%. Additionally, going even further on the credit spectrum- down to junk status- could be even more fruitful. Featuring a similar duration, the PIMCO 0-5 Year High Yield Corporate Bond Index (NYSE:HYS ) yields 5.23%.