With much of the attention on the sharp rise in the Dow Jones Industrial Average in the aftermath of the U.S. presidential election, it may have been a surprise to investors to see negative returns in their portfolio’s bond holdings in the fourth quarter of last year.
- Rising interest rates late in 2016 took a toll on bond prices, and were the catalyst for one of the worst quarters for bonds in recent decades.
- Current expectations are for interest rates to move gradually higher in 2017. While rising rates can be a headwind to bond performance in the near term, they don’t impact the coupon rate or cash flow associated with most bonds over time.
- Over the long-term, higher yields are actually a positive for investors. Even if they remain fully invested in bonds throughout the course of a rate hike cycle, investors should expect to achieve a better return over the long-term when rates rise.
- Recognizing that timing the market is impossible and the long-term benefits of rising rates are real, investors would be well-served to stick to their discipline and remain invested over the course of a cycle, consistent with their goals, objectives, and risk tolerance.