As we watch interest rates move higher this week, we hear the familiar drumbeat of how dire this is for bonds. When interest rates move higher, bond prices decline. However, this decline is felt much harsher for longer-term and longer-duration bond holdings. For example, an investment in a 20-year treasury bond is likely down well over –8% this year. Even the well-known and popular bond fund managers like Jeff Gundlach and Bill Gross, and popular funds like the Pimco Total Return Fund, are seeing negative numbers year-to-date.
For our clients, we welcome higher interest rates, and hope the Federal Reserve increases rates one more time this year. We have been structuring fixed-income allocations to be prepared to take advantage of higher rates much quicker than those with long-duration bond holdings. Our clients with individual taxable bond portfolios are generally seeing positive returns year-to-date simply because of the structure and duration of the portfolio. We feel this confirms the important difference between “managed” bond portfolios with a strategy and purpose, versus those who simply buy bonds from a broker or look for the highest yielding bond or bond funds (which usually means a longer duration). Lastly, when interest rate move higher because of a strong economy and rising wages, it’s a good thing.