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Christine Benz

Portfolio > Mutual Funds > Bond Funds

How Rising Yields Affect Retirees: Morningstar's Benz

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What You Need to Know

  • Retirees need to understand how rising yields affect bond holdings.
  • Many annuity payouts increase in a rising rate environment.
  • Variable debt holdings should be paid off as soon as possible as rates increase.

Rising yields affect everyone, but especially retirees, Christine Benz, Morningstar’s director of personal finance, told Susan Dziubinski, Morningstar’s director of content, in a videocast last week.

As Benz noted, higher interest rates hurt bonds: When yields go down, bond prices go up, and vice versa. “What we’ve seen this year is this downward pressure on bond prices,” she explained.

She added that short-term bond funds were down 3% to 4% through mid-May. Intermediate-term funds were down about 10%. Investors should take an audit of what bond funds they hold.

Keep in mind that these returns don’t apply to those who buy individual bonds, but it can be complicated building one’s own portfolio of bonds, Benz said.

Some other points Benz told Dziubinski:

  • Retirees who hold short-term bonds are better off not using them for spending needs in the near term, as “you want to keep your principal values stable.” She recommended holding cash and using that for now. “Even though inflation will erode the purchasing power of your cash, it’s probably the lesser of the two evils,” she said.
  • If looking at a three- to five-year spending horizon, Benz said being in short-term bonds is “reasonable. You’ll have a little bit of price dislocation as interest rates increase, but you will have a higher yield that you’ll be able to take advantage of.”
  • With a longer, five- to 10-year horizon, the best bet is intermediate-term bonds, she said. They will have higher yields than short-term bonds and cash, “but they will have more price-related volatility,” she explained.
  • Annuities can benefit in a rising rate environment as “annuity payouts rise because of insurers,” Benz noted. She added that “it’s been a long, dark night for the very basic annuity types where payouts have remained very, very low, but I think we will start to see them pick up with interest rates.”

One problem is inflation, she added, stating that “the very basic annuity types have fixed payouts, and your purchasing power will be eroded by inflation.”

  • Debt, especially mortgage debt, can cause surprises in a rising rate environment, Benz said. Many times it’s better to pay off debt, but fixed-rate mortgage holders won’t be affected. Variable-rate debt holders will definitely be affected by rising rates, and “that argues for accelerating those payments because that loan will become more costly for you over time,” she explained.


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