Understanding Rates & Bonds

Why Long-Term Investors Shouldn’t Necessarily Fear Rising Rates

Investors may be concerned that Fed rate hikes may be bad for bondholders but it’s important to remember the fundamental benefits that bonds may bring to a portfolio no matter which way rates move – capital preservation and appreciation, income, and diversification.

With a longer-term mindset and an actively managed approach, bond investors can stand up to the challenge of changing rate conditions.

Focus on Higher Yields

Over the long-term, bond investors may be better off if rates rise. While bond prices typically fall when interest rates rise, the yield for those investments rises. So, earning the yield and reinvesting into higher yields over time can actually increase a bond portfolio’s overall return potential. This can help offset the initial negative price impact of rising rates.

1 Yr.
3 Yrs.
5 Yrs.
Hypothetical example for illustrative purposes only.
Source: PIMCO, as of 30 April 2018. The Bloomberg Barclays Global Aggregate Index (100% USD hedged) was used as a proxy for the global bond market hedged into U.S. dollars. The chart shows the estimated performance of the Bloomberg Barclays Global Aggregate Index assuming parallel rate rise of 1%, and no further changes in rates thereafter. Credit spreads are assumed to remain constant. In the analysis contained herein, PIMCO has outlined hypothetical event scenarios which, in theory, would impact the Index returns as illustrated in this analysis. No representation is being made that these scenarios are likely to occur or that any portfolio is likely to achieve profits, losses, or results similar to those shown. The scenarios do not represent all possible outcomes and the analysis does not take into account all aspects of risk. Total returns are estimated by re-pricing key rate duration replicating portfolios of par-coupon bonds.

Rising Rates Don't Impact All Bonds the Same

News about the bond market typically focuses on government securities, which tend to be the most sensitive to rising rates. In reality, the bond market is exceedingly diverse and global. Each sector or asset class responds differently to economic and market trends and some even tend to do well in a rising rate environment. Skilled active bond fund managers with flexibility and resources may find promising investment opportunities in an effort to capture attractive yield and mitigate risk.

Rate hike period 03/29/88
to 02/24/89
to 02/01/95
to 05/16/00
to 06/29/06
to 03/31/18
U.S. Treasuries 4.05% -2.93% 2.59% 4.90% 2.05%
MBS 5.39% -0.49% 1.60% 6.26% 3.12%
Credit 5.53% -3.76% -0.49% 5.43% 9.85%
Global credit n/a n/a n/a 7.26% 12.04%
High yield 8.70% -1.82% -1.78% 15.63% 25.59%
Global high yield n/a -8.26% 4.53% 20.07% 26.05%
Non-U.S. developed n/a -3.23% 4.05% 9.47% 9.50%
Emerging markets n/a -22.91% 13.70% 24.84% 18.57%
Past performance is not a guarantee or a reliable indicator of future results. The performance data above is not representative of the performance of any PIMCO product. MBS–Mortgage-backed securities

Source: Bloomberg Barclays U.S. Treasury Index; Bloomberg Barclays U.S. MBS Index; Bloomberg Barclays U.S. Credit Index; Bloomberg Barclays Global Agg Credit Index; Bloomberg Barclays U.S. Corporate High Yield Index; Bloomberg Barclays Global High Yield Index; J.P. Morgan Hedged USD GBI Ex USA Index; J.P. Morgan EMBI Global Index. The global credit, global high yield, non-U.S. developed and emerging markets indexes did not exist during the periods marked n/a.

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