TALK ABOUT RATES AND BONDS Most investors are familiar with the bond “seesaw” showing the inverse relationship between bond prices and interest rates – when one rises the other falls. But the reality is much more nuanced. Here we highlight the three important reasons why bonds may be a valuable part of a diversified portfolio across rate environments. Bond declines have tended to be modest and short-lived Bonds have historically been used for capital preservation, income and growth, and diversification due to their low-to-negative correlations to stocks – essential goals for many investors. Bonds, particularly core bonds, have also been less volatile than stocks. In fact, bond declines have been dramatically less severe than stocks and usually short-lived. Download Chart Rising rates build income Because interest income is the primary driver of bond returns, the ability to reinvest into a gradually rising rate environment has the potential to help build long-term growth. When rates rise, new bonds pay a higher coupon, increasing the income investors receive. By contrast, higher rates can be a headwind for equity investors, as increased borrowing costs weigh on corporate profits. An increase in a bond portfolio’s income also helps to offset the negative impact on its declining price. Over time, rising income may provide a return advantage for investors. Download Chart 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 changing rates. In reality, the bond market is exceedingly diverse and global, and each sector or asset class responds differently to economic and market trends. Some, such as floating rate and high yield bonds, actually have tended to do well in a rising rate environment. Although a market event may temporarily depress prices across the board, skilled active bond fund managers can diversify a portfolio in an effort to defend against threats to capital while also seeking to capture a range of growth opportunities for their investors. Download Chart More on Rates and Bonds Section: Tag: Date: Expert: Ticker: Reset All Bonds Are Different Access our thought leadership, investor resources and educational materials on why active management may make sense for bonds.