Dear Linda,

I keep reading that bond yields are spiking. I am curious about what that means. Is it a good or bad thing?

xx

You are correct - this 10-year U.S. Treasury chart shows that yields have spiked recently to a level we haven’t seen since 2007.

A bond’s yield is the return an investor receives on the capital invested.

The Federal Reserve has been raising its benchmark interest rate to try and combat high inflation. This has filtered down to investors in a variety of ways - from higher mortgage and car loans to higher interest rates at your local bank.

Higher interest rates also have an impact on the bond market. When a bond is issued, it is assigned a coupon rate - a fixed percentage the bond will pay out each year. The coupon rate is largely determined by interest rates at the time the bond is issued. Since interest rates are higher, coupon rates on newly issued bonds are also higher.

Are higher yields a good thing?

It depends. Higher yields are just a symptom of other things going on in the market and economy - both of which are complex and likely affect you in different ways. That being said, there are opportunities and drawbacks to be aware of.

Opportunities in higher-yielding environments.

Cash and cash equivalents earn a relatively high return.

After years of earning 0% in your savings account, you can finally get a decent yield - over 4% right now. Don’t assume your money is in a high-yielding account. Check your statement to verify and contact your bank about better options if needed.

Bonds are more appealing to investors.

Investors who hold bonds will see higher income from the portfolio and have the potential to lock in higher-yielding bonds long term.

Cash buyers may be able to grab real estate more easily now.

The real estate market is complicated and still highly competitive, but the lucky few who don’t need a mortgage may have an easier time getting a home now than when mortgage rates were at all-time lows.

Drawbacks with higher-yielding environments.

It is more expensive to borrow.

Borrowing is much more expensive now than in recent years. Taking on debt (and refinancing old debt) is less appealing. Make sure you can afford any debt you acquire.

Bond prices will go down in the short term.

When bond yields go up, bond prices go down. Let’s say a couple of years ago you purchased a bond with a 3% coupon rate. Today, investors can buy a bond with the same characteristics at a 5% coupon rate because interest rates have gone up. If you need to sell your 3% coupon now, you will have to offer it at a discounted price, otherwise, nobody will buy it.

What does this mean? Investors may see unrealized short-term losses on the bonds they hold (assuming they don’t sell and realize the loss), but over the long term, those bonds will mature, reinvest at higher yields, and earn more income than if interest rates remained low over the same time period.

Keep a long-term perspective.

Spiking bond yields are making headlines because it is an important factor - bond yields affect so many things in our market and economy. Instead of trying to predict where everything is headed, focus on what you can control such as keeping debt down, making sure your cash is earning a high yield, and locking in longer-term bonds at higher rates than we have seen in almost two decades.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.