A Historical Take On What A Rate Hike Means For Bond Yields

The sustained assumption over the past couple of months has been that the Federal Reserve intends to increase interest rates in the next few weeks. Coupled with the European Central Bank's announcement that it will be tweaking its bond buying program in the midst of an uncertain eurozone forecast, and some investors cages are rattled. The largest proportion of that anxiety manifested itself in the bond markets, which seems to anticipate an apocalyptic death-spiral of rising rates and plummeting yields.

But whether this anxiety is justified is another matter. In recent history, the bond market has seen relatively low-impact interest rate environment. Where will returns go if interest rates do begin to jump?

Expert's Take

Ben Carlson, author of the wealth management blog "A Wealth of Common Sense," recently appeared on Benzinga's PreMarket Prep morning show. Carlson discussed a post on his site about what an interest rate hike has historically meant for bond yields.

Overall, Carlson's take is far less dramatic than what most investors anticipate, and interest rate increases could actually end up increasing yields, "The thing people are forgetting about bonds is that they all have a maturity date, and they pay interest. When rates rise, eventually you get a higher coupon."

A more in depth breakdown can be found in Carlson's article. The takeaway in his analysis is that, despite an immediate hit, bond yields tend to increase investors' returns as interest rates increase. Carlson explained, "You end up earning more money in the future, but you have to take some losses in the present to get there."

Carlson emphasized it isn't interest rates bond investors should fear, it's inflation.

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