The Role of Core Bonds in a Rising Rate Environment

Verus is excited to announce our most recent Topic of Interest research paper, titled “The Role of Core Bonds in a Rising Rate Environment”, which can be viewed by clicking here.

Following three decades of falling interest rates, many investors believe that rates are set to rise, and fear that those rises in rates will damage the value of their bond portfolios. These investors have increasingly wondered whether it is currently appropriate to hold bonds in their portfolios.

  • A review of (1) the role of bonds in a portfolio, and (2) the behavior of bonds during periods of rising rates, leads us to conclude that bonds play a critical role in a portfolio; one which rising interest rates do not negate.
  • Investors must recognize that fixed income provides a stream of income, acts as a liquid source of capital, and offsets equity risk and stabilizes portfolio value in bond/equity portfolios.
  • Income reinvested at higher rates earns a higher yield and offsets short-term loss of capital.
  • The impact of rising rates on portfolio value depends on the underlying conditions that are driving rates higher.

This research paper is designed to demonstrate that the role of bonds in portfolio construction remains intact on a strategic basis, and that concerns about possible interest rate changes, while important, should not lead investors to simply avoid that exposure.