Understanding Rates & Bonds

Why Long-Term Investors Shouldn’t 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 rise. 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.

14
12
10
8
6
4
2
0
-2
1 Yr.
3 Yrs.
5 Yrs.
Hypothetical example for illustrative purposes only.
Source: PIMCO, as of 31 December 2017. The chart shows the estimated performance of the Bloomberg Barclays U.S. Aggregate Index assuming a 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 U.S. Treasuries, 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 increases in the fed funds rate, some of which tend to do well in a rising rate environment.

Rate hike period 03/29/88
to 02/24/89
325bps
02/04/94
to 02/01/95
300bps
06/30/99
to 05/16/00
-175bps
06/30/04
to 06/29/06
425bps
12/15/15
to 03/31/18
150bps
U.S. Treasuries 4.05% -2.93% 2.59% 4.90% 2.05%
MBS 5.39% -0.49% 1.60% 6.26% 3.12%
Investment grade credit 5.53% -3.76% -0.49% 5.43% 9.85%
Munis 7.47% -3.56% -0.40% 8.97% 4.92%
High yield 8.07% -1.82% -1.78% 15.63% 25.59%
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.
Source: ICE BofAML U.S. treasury Master Index; Bloomberg Barclays U.S. Agency Fixed Rate MBS Index; Bloomberg Barclays U.S. Credit Index; Bloomberg Barclays Municipal Index; Bloomberg Barclays U.S. High Yield 1% Issuer Cap Index; JP Morgan GBI Global Ex-U.S. USD Hedged Index; JP Morgan EMBI Global Index (measures external debt). The non-U.S. developed and emerging markets indexes did not exist during the periods marked n/a.

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An Action Plan for Rising Rates

Skilled active managers with flexibility and resources may find promising investment opportunities in a rising interest rate environment. They can also add value through sector diversification and individual security selection, in an effort to capture attractive yield and mitigate risk.


PIMCO has been helping investors achieve their goals across changing rate environments for 45+ years. Explore a range of strategies that are designed to navigate and even benefit from rising rates.

PIMCO’s Short-Term Strategies

Lower portfolio duration as a way to manage interest rate risk

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PIMCO Unconstrained Bond Fund

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PIMCO High Yield Municipal Bond Fund

Capture the value of municipals’ tax-exempt benefits as they increase with rising rates

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Interest Rate Outlook

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