Rise Above Rates

The Benefits of Rising Rates for Bond Investors

While higher interest rates can weigh on current bond prices, they may ultimately benefit those who reinvest at higher yields.

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.

More from PIMCO on Rates

Section:
Tag:
Date:
Expert:
Ticker:
Reset All

Rising Rates and Bonds

A short video offering basic education on what the fed funds rate is and how changes in the rate may impact bond investments.

PIMCO’s Outlook for Rates

Even amid a tighter policy environment, interest rates should remain historically low in the years ahead.

Rising Rates: Dispelling the Myth

A reasoned analysis that takes into account historical interest rates, the likely path of rates going forward and the impact of past interest rate rises on returns suggests that rising rates may not be such a threat to bond investors.

The Benefits of Active Management When Rates Are Rising

After nearly seven years of a near zero federal funds rate, investors are concerned about an eventual Fed rate hike and investing in the current environment. We discussed rising rates and the benefits of active management with PIMCO managing director Jim Moore.

Load 6 more results

Disclosures

A Word About Risk : 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 the current low interest rate environment increases this risk. Current 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.

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 and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2015 PIMCO