In a broad sense, the rise in bond yields could be considered positive news – after all, the 10-year Treasury yield is generally considered a good indicator of investors’ confidence about the economic outlook. Ironically, though, while higher yields on 10-year Treasuries are seen as a favorable sign for investors, sharp jumps in these yields certainly can, and have, caused sudden pullbacks in stock prices, as has occurred recently. However, such drops often prove to be short-lived. In fact, over the past 30 years, we have seen several instances in which the S&P 500, a widely used stock market index, has increased at a faster-than-average pace during extended periods when the benchmark 10-year rate rose significantly.
So, it’s still reasonable to think that higher bond yields bode well for your investment outlook – but some confusion could enter the picture because rising bond yields are sometimes used interchangeably with higher interest rates, which can be of concern to investors. (The two terms don’t mean exactly the same thing. When you buy a bond, you receive regular interest payments based on the bond’s interest, or “coupon,” rate. A bond’s yield, which is affected by its interest rate and market price, is really a measure of the bond’s rate of return.)
In any case, try not to get too caught up in where interest rates are headed. It’s true that if rates rise, the value of your existing bonds will likely fall, because no one will pay you full price for your bonds when they can buy newer ones issued at higher interest rates. But while you own your bonds, they’ll provide a steady stream of income and can help stabilize your portfolio during periods of market volatility, as bond prices typically don’t move as drastically as stock prices.
If you are concerned about the effect of interest rates on the fixed-income portion of your portfolio, you may want to protect yourself somewhat by owning short-, intermediate- and long-term bonds. Typically, though not always, longer-term bonds pay higher interest rates, so you could always have them working for you when market rates are low, and if rates do rise, you can then reinvest your shorter-term bonds into new ones issued at the higher rates.
As for the effect of rising interest rates on stocks, an upward movement may help some “cyclical” market segments – companies whose businesses and stock prices generally follow the business cycle – but hurt other sectors. Nonetheless, rather than overhauling the equities side of your portfolio in anticipation of the effects of higher rates, you may well be better off by following an “all-weather” approach that includes owning an array of stocks, including those of large and small domestic companies, plus some exposure to international stocks.
Ultimately, rising bond yields and higher interest rates could have some effect on your investment portfolio over the next few months, and you may want to consult with a financial professional to determine what moves, if any, you should make. Overall, your efforts can yield good results when you follow a personalized, long-term investment strategy based on your individual goals, risk tolerance and time horizon.
[Arnetta Tolley, Financial Advisor Edward Jones Investments 626-744-2740 or firstname.lastname@example.org.]