A new era for bond investors?
The latest market moves could mark an important shift in the investment landscape. For much of the past decade, investors became accustomed to exceptionally low interest rates and relatively cheap government borrowing.
That environment encouraged investors to seek returns in riskier assets, while governments were able to issue debt at historically low costs.
That dynamic is now looking increasingly fragile.
Higher yields can be positive for savers and investors looking for income, particularly after years in which returns on cash and high-quality bonds were relatively limited. However, the adjustment can be painful for holders of existing bonds because prices fall when yields rise.
The consequences also extend beyond fixed income. Higher government bond yields increase the return investors can obtain from relatively low-risk assets, potentially reducing the attractiveness of equities and other riskier investments.
Companies can also face higher financing costs, which can weigh on investment, earnings and valuations. Highly indebted businesses are particularly vulnerable if refinancing becomes significantly more expensive.
For investors thinking about how to position a portfolio in a higher-yield environment, understanding the difference between trading and investing and the role of different asset classes is an important starting point.
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