With market yields moving higher, investors have greater potential

Apr 2022
Julianna Donovan

Interest rates are rising – quickly – making bonds more attractive. For example, the 2-year yield on U.S. government bonds increased nearly 2.4 percentage points over the last twelve months, including nearly 1 percentage point in the last month alone! The rise in bond yields in the past few months has created both a challenge and an opportunity for investors. As the Fed pivots toward raising rates to combat high inflation, market expectations drive up bond yields. Given the already low level of yield offered by high-quality bonds, bond prices have come under pressure as investors recalibrate their return expectations. With less income to cushion the price impact, bond “durations” are relatively high for a given maturity, which means the price impact of interest rate changes is greater. Returns for most fixed income sectors were negative through the first quarter of the year due to the increase in market yields, which results in a decline in bond prices. With market yields moving higher, investors have greater potential to generate more income from bond portfolios. We have generally favored exposure to short and intermediate maturity bonds and bond funds in client portfolios for the following reasons: shorter maturity bonds are less subject to price changes as market yields adjust, while bond funds are positioned to benefit in a variety of ways from better reinvestment opportunities and active management.

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