Dear Uplevel,
I keep hearing that bond yields are surging and the bond market is selling off. What’s going on, and should I be doing anything differently?
Sincerely,
Keeping an Eye on Rates
Our Take
Dear Keeping an Eye on Rates,
You may have noticed some unsettling headlines about the bond market lately. Government bond yields have been rising around the world, with U.S. Treasury yields recently reaching their highest levels in more than a year.
So, what’s behind it?
There isn’t just one culprit. Investors are weighing several concerns at once: inflation remains stubborn, higher energy prices could add to inflationary pressure, governments—including the U.S.—are borrowing a lot of money, and there is uncertainty about where interest rates go from here.
When investors demand a higher return to lend money, bond yields rise. And because bond prices and yields move in opposite directions, existing bonds can temporarily fall in value when yields go up.
That sounds bad. Should I be worried about the bonds in my portfolio?
For most long-term investors, no.
It helps to remember why we own bonds in the first place. They aren’t there to outperform stocks. Bonds can provide income, diversification and a more stable source of funds when stock markets are volatile.
And there’s another side to rising yields that doesn’t get nearly as much attention: higher yields mean bonds are paying investors more.
For much of the decade following the financial crisis, investors earned very little for owning high-quality bonds. Today’s higher yields mean that money invested or reinvested in bonds can earn substantially more income than it could when rates were near zero.
There can be some short-term pain as rates adjust upward, particularly for longer-term bonds, whose prices are more sensitive to changes in interest rates. But over time, the ability to reinvest at higher yields can help offset those price declines.
So, should I make any changes?
For most investors, the answer is probably no.
Trying to predict the next move in interest rates is a form of market timing—and interest rates are notoriously difficult to forecast. Selling bonds after yields have already risen can mean locking in losses and potentially missing the benefit of the higher yields now available.
Instead, we think this is a good time to remember what each part of your portfolio is designed to do. Stocks are generally there to provide long-term growth. Bonds have a different job: generating income, providing diversification and helping reduce the overall risk of the portfolio.
If anything, today’s higher yields have made that job a little easier.
As always, we continually evaluate the investments we use and make adjustments when we believe they improve a client’s overall financial plan. But scary bond-market headlines alone aren’t a reason to change course.
The bottom line:
Rising bond yields can create short-term volatility, but they also create better opportunities for future income. For most long-term investors, this is a reason to stay disciplined—not a reason to abandon bonds.
Still have questions?
If the headlines have you wondering about your portfolio, reach out. We’re always happy to talk through what’s happening and what it means—or doesn’t mean—for your financial plan.
Onward and Uplevel,
Anika & Amanda
Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR, and virtually throughout the U.S.
