What Rising U.S. Treasury Yields Mean for Your Bond Portfolio
Bar Chart with Data Points

Higher yields can lower bond prices at first, but over time, they can increase a portfolio’s potential return. Whether that helps or hurts you depends largely on when you’ll need the money.

If your bond holdings have lost value as U.S. Treasury yields have risen, you may be wondering what that means for your portfolio. The answer depends on why you own bonds and when you expect to need the money. 

Treasury yields can affect corporate and municipal bond yields, but they are only part of the picture. Credit quality, taxes, and supply and demand also matter. These factors can add to or reduce the effect of rising Treasury yields on bond prices. 

Higher yields can also increase a bond portfolio’s return potential over time. As bonds mature, that cash can be reinvested at higher yields, adding income that may help make up for some of the drop in the value of your existing bond holdings. 

How higher yields affect bond prices and income 

Exhibit 1 shows what could happen to a hypothetical five-year $100 bond if its yield rises from 3.0% to 5.0%. The bond’s value falls at first. Over time, reinvesting cash at the higher yield may help make up for some of that decline.

Exhibit 1: Higher income may offset an initial bond price decline
Exhibit 1: Higher income may offset an initial bond price decline

Source: Voya IM. For illustrative purposes only. This hypothetical example assumes a $100 bond with an initial yield of 3.0% and a five-year duration (a measure of how sensitive a bond or bond portfolio is to changes in interest rates). It assumes the portfolio’s yield rises by 2.0 percentage points, to 5.0%. The initial price decline is an estimate based on duration, and cash from the bonds is reinvested at the higher yield. The example also assumes that after five years, principal is returned and reinvested into another five-year bond yielding 5.0%. The example does not assume that all bond yields move by the same amount as U.S. Treasury yields. Actual results may differ. The example does not represent any investment and excludes fees, expenses, taxes, defaults, and further changes in yields. Past performance does not guarantee future results.

What higher yields mean for short- and long-term goals 

The same rise in yields can affect people differently based on their goals, income needs, and timelines. If you have more time, you can collect income and reinvest cash from your bonds at higher yields. This may help make up for an early drop in value. If you need the money sooner, you may have to sell before that can happen.

Keep the focus on your plan 

Rather than trying to predict where yields will go next, look at whether your bond portfolio is still doing the job you need it to do. Consider discussing these questions with your financial advisor: 

  • When will I need this money? 
  • What role should bonds play in my portfolio? 
  • Am I taking the appropriate level of risk to earn income? 
  • Does my bond allocation still fit my goals and timeline? 

Your financial professional can review how rising yields affect the bonds you own and whether your bond mix still fits your goals, income needs, and timeline. That review can show whether it makes sense to make a change, take advantage of higher yields or stay the course.

A note about risk: The principal risks are generally those attributable to bond investing. All investments in bonds are subject to market risks as well as issuer, credit, prepayment, extension, and other risks. The value of an investment is not guaranteed and will fluctuate. Market risk is the risk that securities may decline in value due to factors affecting the securities markets or particular industries. Individual bonds generally repay their face value at maturity if the issuer does not default, although some may be repaid earlier if they are called. Their market value may rise or fall before they are repaid. Generally, when interest rates rise, bond prices fall. Bonds with longer maturities tend to be more sensitive to changes in interest rates. Issuer risk is the risk that the value of a security may decline for reasons specific to the issuer, such as changes in its financial condition.

Tags:
Education
IM5985186

Past performance does not guarantee future results. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing, or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain statements contained herein may represent future expectations or other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Actual results, performance, or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views, and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.

Top