How Bond Investors Can Combat Rising Interest Rates, Higher Inflation

Key Takeaways

  • Short-duration securities (bonds with less price sensitivity to interest rate changes) tend to perform better than longer-duration securities when rates are rising.
  • Within the short-duration framework, corporate bonds and other credit-sensitive securities may offer attractive income and total return potential.
  • Rising costs for goods and services can erode portfolios’ long-term purchase power, underscoring the need to hedge against inflation risk.
  • Unlike other securities designed to combat inflation, Treasury inflation-protected securities (TIPS) offer more consistent performance potential and automatic adjustments for inflation.
  • Focusing on short-duration TIPS may provide a dual advantage in today’s climate by helping protect against inflation and interest rate risk.

Bond investors are facing a combination of market dynamics they haven’t seen in a while. Specifically, rates appear to be rising, and the headline annual inflation rate recently hit a 13-year high. These influences typically create challenges for many bonds, but they also highlight opportunities for active, research-driven investors.

Specifically, exploring opportunities among shorter-duration, income-focused securities may help combat the effects of rising interest rates. Bonds offering protection against inflation may help preserve long-term purchasing power.

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How Bond Investors Can Combat Rising Interest Rates, Higher Inflation

Diversification does not assure a profit nor does it protect against loss of principal.

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