Risk of loss in high-quality bonds if rates rise
July 29, 2013
A newly revised Vanguard research paper offers insight on the risk of higher interest rates to a broadly diversified bond portfolio. The authors point out that a bear U.S. bond market would likely be far less punishing to a portfolio's return than a bear U.S. stock market. If yields moved up, the higher level of income could eventually be expected to offset the impact of price declines. Probably most important, the authors state, return simulations indicate that bonds, despite their low current yields, can be expected to remain one of the best diversifiers of equity market risk and to continue to provide meaningful downside protection to long-term investors holding well-diversified, balanced portfolios.
- All investments are subject to risk, including possible loss of principal. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
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