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Inflation and Interest Rates

PIMCO’s latest views and solutions to help investors navigate inflationary risks and the path toward higher interest rates

Latest Insights

On-and-Off-and-On-Again Progress Toward a U.S. Debt Ceiling Agreement
23 May 2023
We remain constructive on a deal coming together in time to avert a default on U.S. debt, though we expect continued drama in the very near term.
Economic and Market Commentary
Positioning Portfolios for Today’s Markets
18 May 2023
Find out how we’re positioning portfolios across global asset classes, and why we remain cautious on risk overall, with Erin Browne, portfolio manager and head of asset allocation.
Economic and Market Commentary
Targeting Relative Value Opportunities
18 May 2023
Learn how we’re finding interesting relative value opportunities across asset classes and within asset classes, and why we think there are many reasons to be excited about the opportunities ahead, with Erin Browne, portfolio manager and head of asset allocation, and Justin Blesy, asset allocation strategist.
When High Alpha Met Low Beta
18 May 2023
A closer look at performance across hedge fund styles.
Modernizing the Diversification Toolkit: Allocating to Defensive Alternatives
15 May 2023
A guide for investors embarking on the journey of building a defensive alternatives program.
Spring Brings Cautious Optimism to U.S. Housing Market
11 May 2023
Although affordability remains an obstacle, recent data offer reasons to be more constructive as broader conditions still appear supportive of home prices.
Sustainable Investing: Insight Through Engagement
10 May 2023
Engagement is an essential tool for sustainable investing, as it can enhance investment insight and help influence positive change.
Economic and Market Commentary
Whether Pause or Pivot, Look to Bonds
10 May 2023
An allocation to fixed income may help investors navigate a potential recession as well as uncertainty around the Federal Reserve’s policy trajectory.
Pausing Is Not on the ECB’s Agenda as Inflation Concerns Persist
04 May 2023
The European Central Bank hikes rates and indicates there is more ground to cover.


Are rising rates bad for bonds?

As global monetary conditions tighten, investors may be concerned about the impact on bondholders when interest rates are rising. Although bond prices typically fall when rates rise, the yields on newly issued bonds will also increase. Reinvesting into higher yields over time can actually increase a bond portfolio's overall return potential. This can help offset the initial price impact of rising rates.

What can a flattening or steepening yield curve signal about the economic outlook?

A yield curve is a line graph of the relationship between bond yields and time to maturity, with the U.S. Treasury curve the most widely used. The normal shape, or slope, of the curve is upward (from left to right), meaning yields usually rise with maturity. The curve can signal where investors think interest rates are headed, and historically the slope has been a worthy indicator of economic activity.

A sharply upward sloping, or steep, curve has often preceded an economic upturn. The assumption is that interest rates may rise significantly in the future. Investors demand more yield to buy longer-dated bonds in anticipation of accelerating economic growth and/or rising inflation.

Curve flattening can signal a slowdown. It often occurs later in a cycle when a central bank raises interest rates to restrain a rapidly growing economy and tamp down inflation. Short-term yields can rise to reflect rate hikes, while long-term rates may fall as expectations for inflation and growth moderate.

What influence does inflation have on rates and vice versa?

Inflation and interest rates are often correlated and at times can move in tandem. Rises in key inflation gauges such as the consumer price index (CPI) or personal consumption expenditures (PCE) can prompt investors to demand higher yields on longer-dated bonds to compensate them if inflation remains elevated. Persistent acceleration in inflation can also lead central banks to raise short-term policy rates to increase the cost of borrowing and rein in price gains.

By contrast, signs of decelerating inflation can push bond yields lower. Persistently below-target inflation can trigger a loosening of monetary policy, including a lowering of interest rates, with the aim of encouraging borrowing and spurring growth.

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Bonds That Last

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All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.