Learn about investing in bonds in a rising interest rate environment. 

  • Interest rates and the prices of bonds have an inverse relationship, meaning when interest rates rise, bond prices will decline.
  • There is no single profile of a rising rate environment, as small incremental increases over an extended period of time will more easily allow the markets to adjust, while larger increases over a shorter time period could prove more disruptive.
  • Though rising interest rates represent an adverse environment for fixed income portfolios, the benefits of the asset class remain in place.

After a decade-long slide in interest rates, bond investors may be facing a period of sustained rate hikes, prompting worries about the implications for their fixed income investments. While rising rates present unique challenges to those who invest in bonds, there are strategies for adapting to this evolving vista.

Interest rates have been at historical lows since the Federal Reserve (the Fed) implemented an unprecedented policy of monetary easing in response to the credit crisis that began to unfold in 2008. A decade later, as the Fed has begun to move toward monetary policy normalization, investors may now be confronting an unfamiliar economic and investment landscape marked by rising interest rates and rekindled inflation.

Interest rates rarely change direction for a single reason, and the path they travel isn’t always a straight and predictable one. Still, there are several key influences that affect the direction of interest rates, which warrant close monitoring, including, Federal Reserve policy, economic conditions, inflation, fiscal policy, and the bond market.  

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