Interest rates will eventually rise, and while many debate when that will happen, the real story is how that eventual decision will impact your finances and investments. David Fisher is a PIMCO product manager for core fixed income strategies and he recently discussed how and why rising interest rates could be beneficial for fixed income investors. Specifically, Fisher examined the benefits for bond investors.
Fisher states that, “it may seem counterintuitive for bond investors to benefit from an interest rate hike because a bond’s price and its yield are inversely related,” so if rates rise then bond prices fall. However, Fisher notes that, “If you consider the way bonds actually work, then it makes sense that rising yields are good for bond holders.”
Ignoring the potential credit risk, an informed bond investor can reasonably predict the total return of a bond from the day it’s purchased until it matures. If interest rates fall, then the current price of the bond goes up. However, that price change doesn’t change the total return of the bond over the course of the bond’s lifetime. “If interest rates rise though, then the price of the bond goes down without changing the total return you’ll see. The falling price pushes some of the return into the future.” Fisher explains that whether interest rates fall or rise, you will not see a change in your existing bonds.
However, what does change is the level of yields investors will see when they reinvest the proceeds of coupons or maturing bonds. If the interest rates fall then investors will see lower yields available in the market. But, if interest rates rise, investors can reinvest their principal to receive a higher yield. The reinvestment disparity can create very different outcomes for a bond investor.
An interest rate hike will mean different things for different investors, but there will still be numerous ways to benefit. If you’re looking for ways to reinvest or grow your wealth, then contact an expert at Apex Financial Advisors today to start finding investment solutions and new ways to grow and protect your personal wealth.