How do rates affect bond performance? (2024)

FAQs

How do rates affect bond performance? ›

Why interest rates affect bonds. Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.

Key Takeaways. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

When rates go up, bond prices typically go down, and when interest rates decline, bond prices typically rise. This is a fundamental principle of bond investing, which leaves investors exposed to interest rate risk—the risk that an investment's value will fluctuate due to changes in interest rates.

However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.

Alternatively, if prevailing interest rates are increasing, older bonds become less valuable because their coupon payments are now lower than those of new bonds being offered in the market. The price of these older bonds drops and they are described as trading at a discount.

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

The share prices of exchange-traded funds (ETFs) that invest in bonds typically go lower when interest rates rise. When market interest rates rise, the fixed rate paid by existing bonds becomes less attractive, sinking these bonds' prices.

Normally longer-term Treasury securities have higher yields than shorter-term ones. That's because the longer duration of those securities exposes them to more of a risk if interest rates rise over time. However, in advance of recessions, the rate structure of Treasury yields, often called the yield curve, can invert.

Are bonds a good investment in 2024? ›

As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.

If the holding period return generated by selling now is equal to or greater than if you held it until maturity, it's probably time to sell.

Junk bonds have lower ratings. The higher a bond's rating, the lower the interest rate it will carry, due to the lower risk, all else equal. The bond rating agencies rate all types of bonds, from corporate bonds to sovereign bonds.

Rising yields are a function of falling prices; falling prices usually mean an asset is out of favour, yet higher bond yields signal better returns for those who buy at less than par value.

The winners. Unsurprisingly, bond buyers, lenders, and savers all benefit from higher rates in the early days.