Adjustments for Bond Investors If Higher Yields Materialize

With long-term sovereign bond yields sitting near rock-bottom lows after a sharp year-to-date decline, many wonder what lies ahead. Some speculate rates have even further to fall—hence, the steady demand for super-low and even negative-yielding bonds. Others, however, expect a reversal—with rates rebounding some as recession fears abate. The US yield curve's return to a positive slope on Friday morning might spur that sentiment even more, which may raise the question of how to position today. With rising yields come falling bond prices, potentially making bonds appear unattractive: If bonds' purpose in a portfolio incorporating a mix of bonds and stocks is to reduce expected short-term volatility, the prospect of declining prices may seem counterproductive. But we don't think it should. Potentially rising long-term interest rates might be reason for bondholders to tweak the mix of bonds they own, but we don't think it is reason to ditch them outright.