I recently read an article on Vanguard’s website talking about why higher yields may be a good thing for investors. As you may know, in 2022 when interest rates went from essentially 0% to 5% it was bad for both the stock market and bond market, with both of them down over 10% for the year. But now at the end of 2023 we are looking at these rates that have stayed pretty steady the past 12 months or so, and wondering, “are higher yieds actually a good thing?”
The article, which I have pasted below, does a good job of discussing why higher yields may actually be a good thing rather than the bad thing many people expected over the past year and a half. Below I have outlined 7 bullet points that I took from the article. If you have any questions on bonds, yields, or anything finance related let us know.
- Historic Return to Normalcy: After years of low interest rates since the 2008 financial crisis, higher yields mark a return to more traditional levels, promising better income prospects for investors.
- Enhanced Portfolio Diversification: The role of bonds in providing income and reducing stock market volatility becomes more pronounced with higher yields, benefiting overall portfolio health.
- Income and Reinvestment Benefits: Higher yields increase the income from bonds and offer opportunities to reinvest at more favorable rates, potentially boosting long-term returns.
- Strategic Value for Retirees: For retirement investors, higher yields mean potentially higher income streams, making them crucial for income planning and financial stability in retirement.
- Inflation Hedge: The increased income from higher yielding investments can serve as a buffer against inflation, preserving purchasing power.
- Adjustments in Investment Strategies: Investors may need to reevaluate their investment approaches in light of rising yields, focusing on long-term benefits and adjusting risk profiles accordingly.
- Long-term Growth and Risk Management: While higher yields may pose short-term valuation adjustments for existing bond holdings, they offer significant long-term growth through compounding and risk management advantages.