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What Rising Bond Yields Mean for Your Portfolio

Now is a good time to check in on your asset mix.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Bond yields have jumped up over the past several months. In fact, the yield on the 10-year Treasury bond is about a full percentage point higher now than it was last summer. Joining me today to talk about what rising yields mean for your portfolio is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine. Thank you for being here today.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: Why are yields on the rise?

Benz: It's a good question. I would say the major driving factor seems to be inflation. It seems that investors are assuming that the combination of the stimulus package, growth in the economy as a result of the vaccine, a lot of factors, pent-up demand, could drive inflation in the future, and that in turn is what's driving interest rates up, because there's the anticipation that the Federal Reserve may act at some point in the future to stave off inflation. So, investors are trying to kind of get ahead of that action.

Dziubinski: And so, what have the implications been for bonds?

Benz: Well, it hasn't been good for bonds and the longer you've been, the more volatility you've experienced as a result of these rate changes. So, when we look at long-term government bonds or long-term corporate bonds even, for the year to date through early March, you see losses of about 10% on indexes and funds that track those indexes that invest in long-term bonds. For short- and intermediate-term bonds, there has been less rate-related volatility. So, those indexes and those products that track them are down about 1% or 2% for the year to date through early March. So, it really depends on what you've invested in. If you've invested in riskier, higher-yielding securities, they have experienced a little bit less of rate-related volatility as well because their yields are higher. They protect them a little bit during periods like this.

Dziubinski: And what impact has this had on stocks?

Benz: Well, it certainly seems to be shaking the stock market here and there. We have seen stocks anticipate inflation as well, and that causes a couple of ripple effects. One is that it requires borrowers, corporate borrowers, to pay more to service their debt. So, investors in stocks are looking at that. And they're also looking at the idea that higher interest rates, higher inflation, could curb consumer spending a little bit. So, that has hurt stocks a little bit. It's been interesting to see how concentrated that has been with the technology sector, especially really bearing the brunt of those worries. We've seen significant volatility there, and that's a little bit unusual. Because oftentimes, when we do see these inflation and interest-rate worries roil the market, that's oftentimes more concentrated in the economically sensitive sectors, which are often value-leaning. This time, we're seeing it in the growth area. And I think that's simply because that sector, large-growth stocks and mid-growth stocks, were a little bit overvalued coming into this period. So, they were simply more vulnerable from that standpoint.

Dziubinski: What should investors be doing or thinking about at this point?

Well, I think that the little bit of volatility that we've had in stocks is a reminder to take a look at your portfolio's asset allocation, check it to see whether you're in line with your target. It's been really easy to be hands off and to be just kind of living with our portfolios, because we've seen such strong performance from stocks. But I do think that it's important--for people getting close to retirement, especially--to revisit their portfolios' asset allocations. Make sure that they've taken some risk off the table in anticipation of volatility. Because anytime you see a stock market that has performed as well, as long as this one has, I think you want to be careful about not taking too much equity risk in your portfolio.

Within your fixed-income portfolio, I like the idea of matching the durations of any bond funds that you hold, or bond ETFs that you hold, to the holding period that you expect to have for them. So, if you have a very short-term holding period for your money, like a two- to three-year time horizon, there you'd want to stick with some sort of a short-term bond product. If you have a slightly longer time horizon, like in the neighborhood of five to 10 years, if that's your holding period, for that bond fund I think you could reasonably hold intermediate-term bonds. But you want to take care to match those durations of those products to your holding period.

Dziubinski: Now, what about other portions of our financial plans? What should we be keeping an eye on right now?

Benz: Well, borrowing costs, I think, are a big one. We consumers do shoulder borrowing costs, especially if we have mortgage debt. There has been quite a frenzy in the homebuying market. We've seen mortgage rates lift up a little bit here. I think the overarching message I would impart is that interest rates are still really low. It's still a really good time to be a borrower. But it may tick up over time, and we've begun to see that. So, if you are close to buying a property or close to refinancing a mortgage, it seems like it's still not a terrible time to lock in what are pretty low rates today.

Dziubinski: Well, Christine, thank you so much for your time and perspective today. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thank you for tuning in.