David Fisher, PIMCO's product manager for core fixed income strategies, including Total Return, discusses why rising interest rates can be beneficial for fixed income investors.
It may seem counterintuitive to say that rising rates are good for bondholders. Prices move in the opposite direction of yields, so if rates rise, bond prices fall.
But if you think about the way bonds actually work, it does make some sense that rising yields might be good for bondholders.
- Putting credit risk aside, investors have a very good idea of the total return they will receive on a typical bond from the day it is purchased until the day it matures. They will receive a fixed coupon, or periodic interest payment. And they will get par, or the face value of the bond, back at maturity.
- Whether yields rise or fall, it doesn’t change the total return on the bond over the life of the bond.
- What does change when interest rates move is the level of yield investors will receive when they reinvest the proceeds from either the coupons or the maturing bonds.
- If interest rates fall, investors are forced to accept the lower yields that are available in the market. If interest rates rise, investors are able to reinvest at higher yields. That reinvestment difference can result in a very different outcome for a bond investor.