|We all see it in our investment portfolios – our stocks are down, but in some cases, our bonds are down even more! The good news is that if bonds are not sold before maturity and there is no payment default by the issuer, the current value of a bond may not be terribly important. That said, it is still hard to see the reduced value when looking at your investment statements.|
The rapid rise in interest rates in 2022 has led to one of the worst years for the bond market in recent memory. For perspective, the 10-year U.S. Treasury rate started the year at 1.52%. Today, investors can purchase 10-Year Treasury bonds and earn about 4.05%.
The simple phrase, “bond prices and interest rates move in opposite directions” is often confusing and counterintuitive. The chart below clearly demonstrates the relationship. Here is the reasoning behind this relationship using 10-Year Treasury bonds as an example:
Let’s say you bought a 10-Year Treasury bond with a yield of 1.52% at the beginning of 2022. Today, another investor can go to the market and buy a 10-Year Treasury bond yielding more than twice the bond that you own! Therefore, if you wanted to sell your bond in the market with a yield of 1.52%, it would clearly be worth less than what is currently available. As a result, an investor would demand a lower price to compensate them for the inferior yield. In very simple terms, that is why when rates rise, the value of current bond portfolios falls… and, of course, the opposite is also true.
The good news for long-term bond investors is that although the current value of many bond portfolios is significantly lower than it was to start the year, rolling interest payments or additional cash into bonds at today’s yields increases the average interest rate on your bond investments, improving the overall income profile of your portfolio.
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