Someone recently asked, “If rates are going up, why invest in bonds?”
The short answer is because the yield may more than compensate you for the interest rate risk that you are taking.
The longer answer is that the question itself is problematic:
- Firstly, this common question rarely indicates which rates are going up. Overnight rates (like the headline Fed Funds rate) or long-term rates (like the benchmark 10-year Treasury)?
- The question also pre-supposes that anyone knows whether rates are going up or down. If anyone knew the direction of specific rates with certainty, they could retire by tomorrow.
- Even if someone did know that a specific rate was going up, they wouldn’t know how much the rate was going to change or over what timeframe.
All of the above relate to simple Treasury bonds and do not even touch on any form of credit, the shape of the yield curve, or larger questions like asset allocation, diversification, or correlations.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Disclosures & Disclaimers page for a full disclaimer.