Mitch's Mailbox

April 15th, 2022

The Role of Bonds in a Rising Interest Rate Environment

Share
Subscribe

Jerry M. from Casper, WY asks: Good evening, Mitch. If interest rates are going to keep going up, which seems to be unavoidable, does that mean now is a bad time to own bonds? If I already own bonds, is it too late to make changes?

Mitch’s Response:

Thanks for writing, Jerry. For readers who may not understand the reasoning behind your question, you are referring to the inverse relationship between interest rates and bond prices. When interest rates go up, bond prices go down, which is why you’re questioning the ownership of bonds in a rising rate environment.

But rising rates alone are not necessarily a good thesis for avoiding or selling bonds. Over time, the performance of bonds and stocks are not tightly correlated, which means many investors can derive benefits from owning bonds as a diversification tool. Bonds can help mitigate equity risk and volatility over time.1

_________________________________________________________________________

Protect Your Investments From Volatility and Interest Rates!
 
As interest rates rise, remember that dealing with the turbulence in the market is normal. Even so, the sudden ups and downs of the market can be very challenging to manage. But, even when your uncertainty levels are high, do you know that there are several positive aspects of volatility?
 
If you have $500,000 or more to invest, get our free guide, “Using Market Volatility to Your Advantage,” and learn our insights, based on decades of experience, about how a volatile market may be able to help investors refine their strategies and potentially generate solid returns over time.
 
You’ll get our ideas on:

Download Our Guide, “Using Market Volatility to Your Advantage”2

_________________________________________________________________________

In my view, ownership of bonds in your investment portfolio is more about what your long-term goals and objectives are, not necessarily a factor of whether interest rates are poised to go up or down. If, for instance, you are already well into retirement, want to minimize volatility, but still need some growth and income, it’s likely that bonds would make sense as part of your overall asset allocation. During a recession and bear market, for example, bonds are likely to help mitigate some of the downside experienced on the equity side of the portfolio.

That all being said, investors should certainly try to actively manage bond portfolios through various interest rates and market cycles. Using bond ladders is an example of an approach that allows an investor to use proceeds of a maturing bond to invest in new bonds, such that the duration of the bond portfolio remains steady but new bonds with different – and perhaps higher – yields are periodically introduced into the portfolio. Higher yields of newer bonds can make up for price dips along the way.

Another factor to keep in mind is that credit quality in the U.S. is very strong, in terms of U.S. Treasury bonds, investment-grade corporate bonds, and municipals. In other words, these bonds are almost certain to make their interest payments on time over the life of the bond, as well as reliably return principal once the bond matures. There’s still plenty of safety to be found for investors willing to hold bonds to maturity, which underscores a key reason for owning bonds in the first place.

I think the bottom line here, Jerry, is to think about what purpose bonds are serving in your portfolio, and how they fit into your longer-term goals and objectives. In other words, I would focus less on interest rate forecasts and more on what you need within your own financial and retirement planning.

Even in times like these when interest rates are rising, do you know that investors still have an advantage over market volatility? There are positive aspects of it that you don’t want to overlook. You have the opportunity to make the most out of these challenging times!

To give insight into some of these positives, I am offering all readers our guide “Using Market Volatility to Your Advantage”3. This guide can help you learn about our insights, based on decades of experience, about how a volatile market may be able to help investors refine their strategies and potentially generate solid returns over time.
 
You’ll get our ideas on:

If you have $500,000 or more to invest, download this free guide today by clicking on the link below.

Disclosure

1 Market Watch. November 23, 2021. https://www.marketwatch.com/story/you-can-beat-your-fear-of-losing-money-with-bonds-as-interest-rates-rise-if-you-understand-this-one-thing-11634742389?mod=article_inline

2 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
READ PREVIOUS
3 Positives That May Boost Stocks This Year
READ NEXT
3 Ideas for Investors to Hedge Against Inflation and Rising Rates

Explore Zack’s Archives

View
Mitch's Mailbox
March 27th, 2024
Navigating Global Rate Cuts And Maximizing Investment Potential
Read more
Mitch's Mailbox
March 26th, 2024
Will a “Wall of Cash” Hit the Markets if Rates Fall?
Read more
Private Client Group
March 26th, 2024
Fed Holds Rates Steady, U.S. Industrial Output Flat, Real Estate Commission Shake-Up
Read more
Mitch on the Markets
March 25th, 2024
What Do Rising Corporate Debt Defaults Mean For The Economy?
Read more
Private Client Group
March 18th, 2024
Inflation Slightly Higher, UK Economy Grows, Retirement Savings Improve
Read more
Mitch on the Markets
March 18th, 2024
Waiting for the Market to Drop Before Investing? Read This First.
Read more

Daily financial tips directly
from the Zacks family.

Top

Search

Contact

I'm a Private Client I'm a Financial Professional