There's no doubt that one of the great bull markets in history is over.
The bond market put on a striking long-term performance with yields falling from more than 15% to around 1% over the past four decades.
Yet the surge in inflation to 8.6% over the past 12 months put an end to the era of low interest rates. The Federal Reserve's sharp hike of the benchmark interest rate on June 15 is a punctuation mark to the new rate regime.
What are some implications for bond investors?
Bonds don't do well when inflation is climbing higher. The math is inexorable. When interest rates rise, bond prices fall.
For example, let's say you own a U.S. Treasury with a fixed payout of 2%. Market interest rates rise to 3%. If you tried to sell your Treasury bond, its price must fall since it's competing for investors that can buy a similar security yielding 3%. Even if you don't sell, your bond price will adjust to the new rate environment. You'll show a paper loss.
That said, investors shouldn't fear the rise in rates, assuming you don't need money immediately. The math eventually starts working in your favor.
Fixed income investors benefit from higher interest rates as they reinvest their money at newly available higher yields. Most people own fixed income investments through mutual funds, say, in their retirement savings plan. In that case, you're probably reinvesting the dividends and your fund is buying new fixed income securities at higher rates.
