When Interest Rates Rise, What Should You Do with Bonds?

August 7, 2022
Bonds can play an important role in your portfolio, but how do rising interest rates affect fixed income?
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  • Check out resources for fixed-income investors at Schwab.com/FixedIncome.
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  • Check out resources for fixed-income investors at Schwab.com/FixedIncome.
  • Stay informed about moves at the Federal Reserve and other topics with Schwab Insights & Education—visit Schwab.com/Learn.

The Fed is hiking short-term interest rates to slow the economy. Now the bond market is starting to expect less inflation longer term, and so yields on Treasury bonds have declined from their peak. What should bond investors do?

In this episode, Mark Riepe speaks with Kathy Jones, Schwab's chief fixed income strategist. Kathy has analyzed global bond, foreign currency, and commodity markets extensively throughout her career as an investment analyst and strategist, working with both institutional and individual clients. Kathy makes regular broadcast appearances on CNBC, Yahoo Finance, Bloomberg TV, and many other networks and is often quoted by The Wall Street JournalThe New York TimesFinancial Times, and Reuters.

Kathy and Mark discuss the reasons why investors typically hold bonds in a portfolio, how the yield curve tends to function, quantitative tightening, and many other topics related to bonds and the current interest-rate environment.

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Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

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Preferred securities are often callable, meaning the issuing company may redeem the security at a certain price after a certain date. Such call features may affect yield. Preferred securities generally have lower credit ratings and a lower claim to assets than the issuer's individual bonds. Like bonds, prices of preferred securities tend to move inversely with interest rates, so they are subject to increased loss of principal during periods of rising interest rates. Investment value will fluctuate, and preferred securities, when sold before maturity, may be worth more or less than original cost. Preferred securities are subject to various other risks including changes in interest rates and credit quality, default risks, market valuations, liquidity, prepayments, early redemption, deferral risk, corporate events, tax ramifications, and other factors.

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