How Do Interest Rates Affect Bonds?
Rising interest rates aren’t the only thing you need to think about before investing in bonds.
Carole: I hope I’m not interrupting anything, but I need relationship advice.
Katherine: I’ll try my best. What’s up?
Carole: Let me clarify: It’s not about me. It’s about the relationship between bonds and interest rates. Think you can help?
Katherine: Well what do you want to know?
When Interest Rates Rise, Bond Prices Fall
Carole: So, when interest rates go up, bond prices go down. Is that a red flag?
Katherine: It depends on how you look at it.
Carole: So rising interest rates aren’t all that scary?
Katherine: Not all the time. Investors can even benefit, if they take the payment they received from bonds they already own and invest that in new bonds that pay a higher interest rate.
What If Interest Rates Go Down?
Carole: But, what if it’s the opposite and interest rates go down? Are bonds still a worthwhile investment?
Katherine: You need to stay focused on yourself. Don’t go chasing interest rates.
Carole: What do you mean by that?
Katherine: You need to look at your portfolio and your goals. Then, you can ask yourself: “Do I need bonds?”
Carole: All right, I guess you’re right. I’ll focus on my relationship with my portfolio first.
Katherine: I’m glad I could help. I’m always here if you need to talk.
Carole: I really appreciate it.
Watch “Why Bear Markets Can Be a Good Time to Invest” for more from Carole Hodorowicz and Katherine Lynch.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.