You probably heard rates are rising. The 30-year Treasury yield touched its highest levels last month since 2007. Rising yields are the apocalypse du jour. The 10-year Treasury has climbed from 4.18% to 4.79% year to date. We are told we should worry about this. Certainly you don’t have enough on your mind already. Can you imagine allocating mental space to something so banal? Many would like you to do so. The headlines are everywhere. History will show Americans in spent August of 2026 thinking and talking about The Odyssey, Lindsay Clancy, and Treasury yields.
Given all the hullabaloo about rising yields, you may infer the media heralded falling yields as good news in other times. You would be wrong. A few samples:
“Bond Yields Fall as US Recession Fears Grow” – The Financial Times, October 2007.
“Bonds Ring Economic Alarm Bells” – CNN Money, May 2010
o From the article: “The 10-year Treasury yield tumbled to as low as 3.1% over six weeks…”
“10-Year Treasury Yield Drops to Record Low of 1.30% on Coronavirus Fears” – CNBC, February 2020.
Yields up? Crisis. Yields down? Crisis. It’s always a crisis.
The 10-year Treasury is the benchmark rate for the economy. Here it is since the beginning of 2023:
It has not exceeded the 4.98% level seen in October of ’23, and it’s 0.59% above its average since then. “Benchmark yield highest since January of last year” isn’t much of a headline, so no one wrote it. Care to guess what the S&P 500 has returned amidst the above apparently horrifying climb in yields?
102%
Equity investors doubled their money.
Since the Fed introduced zero interest rate policy (ZIRP) in the aftermath of the 2008 Global Financial Crisis, we have become accustomed to abnormally low rates. Low rates on savings accounts, low yields on bonds, low rates on mortgages. Perhaps what we’re experiencing now is normalization. Here’s the 10-year going back to 1962:
You can draw your own conclusions from the above chart.
No one seems to be writing articles about the advantage of higher yields for bond investors. Bond prices move inversely to yields. The reason is simple. If a corporation issues a $1,000 bond paying 5% and the market subsequently drives yields of comparable debt to 6%, no one will buy the 5% bond for $1,000. The 5% bond owner must accept a discount to compete with comparable debt yielding 6%. If you own a portfolio of bonds, rising interest rates are painful as they diminish the value of your portfolio. Bond investors carry scars from 2022, where they owned a portfolio of low-yielding bonds (the federal funds rate was 0.25% in January of 2022 and the 10-year yielded 1.7%). Then the Fed initiated the fastest rate hiking cycle in history to tame post-shutdown inflation, and bond investors watched their portfolios fall in value with little starting yield to offset the decline. The US Agg (think the S&P 500 for bonds) fell 13% in 2022. That was supposed to be the “safe” allocation in many portfolios.
In fact, bond investors have struggled since the Fed instituted ZIRP in 2009 to stimulate the economy post financial crisis. Here’s the US Agg and inflation charted since the equity markets bottomed in March of 2009 to present:
For the last seventeen and a half years, bond investors (measured by the aggregate bond index) have merely kept pace with inflation. Real (inflation-adjusted) returns of zero.
But is the past indicative of the future? Our guess (disclaimer, no crystal ball sits on my desk) is no. The best forward predictor of bond returns is starting yields, and starting yields are finally at levels closer to the long-run average. One of the most important metrics of a bond portfolio is its duration, a measure of its sensitivity to interest rates. This is a bit oversimplified, but a bond portfolio with a duration of 5 will move approximately 5% inversely to each 1% change in interest rates. If rates fall by 1%, portfolio value rises 5% and vice versa. The US Agg currently has a duration of 5.7 and a yield of about 4.5%. So, roughly speaking (these calculations are imprecise as they don’t consider convexity, but they’re close), if rates rise by 1%, the US Agg investor will suffer a ~5.7% decline in portfolio value offset by a ~4.5% yield for a total return of -1.2%. However, rates falling by 1% will cause the portfolio to rise by ~5.7% for a total return of +10.2% after adding in the yield.
Perhaps rising yields aren’t all bad after all.
Sean Cawley, CFP®
Source: YCharts
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