Ever wonder exactly how rising interest rates hurt your fixed income investments? Many investors haven’t had to worry about this question for years, as the Federal Reserve has continued its zero-rate policy, and the bull market in bonds has gone on for decades. Beyond that, they may have heard that bonds are ‘safe haven’ investments. But that may change next month, if Fed policymakers pull the trigger and boost rates. ‘The math just does not work in favor of the individual investor,’ said Stewart Taylor, a Vice President at Eaton Vance, where he works as a portfolio manager and department strategist for the Diversified Fixed Income group. Taylor said there’s an under appreciation of the mathematics behind bond investing and proceeded to give us a lesson. ‘If you own a ten-year Treasury, or a ten-year corporate, it has, what we call in the business, a duration of ten years. So that means for every 1% rates go up, the loss on that security will be 10%,’ he said. Taylor spoke at Camp Kotok, an annual gathering of economists and money managers in Maine.
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