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When interest rates rise, existing fixed-rate bonds generally lose market value, while newly issued bonds may offer higher yields. That does not automatically mean you should sell bonds or change your stock-and-bond mix. First check what you own, how sensitive it is to rates, and whether your allocation still fits your goals, time horizon, risk tolerance, and need for cash.
What happens to bonds when interest rates go up?
Market yields and the prices of existing fixed-rate bonds generally move in opposite directions. If a bond pays a fixed coupon below the yield now available on comparable new bonds, its market price may fall to make its remaining payments more competitive. The U.S. Securities and Exchange Commission (SEC) explains this relationship in its bond investing bulletin.
The SEC’s June 26, 2013 illustration makes the mechanism concrete, but it is not a current market observation or a forecast: a 10-year Treasury bond with a 3% coupon and $1,000 face value is worth $925 after one year if market rates have risen from 3% to 4%, leaving nine years to maturity. The example assumes the stated bond and rate change; it is not a general rule for predicting how much a portfolio will move.
A Treasury’s government backing concerns promised payments, not the market price you might receive if you sell before maturity. If you hold an individual bond to maturity and the issuer makes the promised payments, interim price changes may matter less to your outcome; default, inflation, and liquidity risks still remain. A bond fund, unlike an individual bond, does not give you one maturity date at which your entire fund investment is repaid.
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For otherwise similar bonds, longer maturities generally have greater interest-rate risk than shorter maturities, and lower-coupon bonds generally are more sensitive to rising market rates. These are comparisons between similar securities, not a complete way to rank every bond or fund.
Check a fund’s stated duration where available, as well as its maturities and holdings. Maturity is the time until a bond is due; duration is a measure of rate sensitivity, so do not treat the two as interchangeable or infer a fund’s duration from its maturity alone. The SEC’s educational materials establish the general maturity and coupon relationships but do not supply a numerical duration rule for estimating a portfolio’s price change.
Should you sell bond funds when rates rise?
A rate increase by itself is not a sufficient reason to sell. Selling may lock in a loss relative to your purchase price, while continuing to hold exposes you to the fund’s ongoing price movements and other risks. The right choice depends on why the bonds are in your plan, when you need the money, and the fund’s interest-rate, credit, inflation, and liquidity exposures.
Review your holdings before acting:
- Identify what you own: individual bonds, bond funds or ETFs, cash equivalents, stocks, and other assets behave differently.
- Inspect bond exposure: where the information is available, look at duration, maturities, coupon or reset terms, credit quality, and whether holdings can be called.
- Check your cash needs: money needed soon may call for a different level of liquidity and market risk than money invested for a distant goal.
- Compare with your plan: decide whether the current mix still fits your goal, investment horizon, financial circumstances, and tolerance for loss.
Shorter-maturity or floating-rate bonds may respond differently to changing rates, but neither is automatically safer or more suitable. Shorter maturities can mean different income and reinvestment trade-offs; floating coupons do not eliminate credit, inflation, or liquidity risk. Compare these features alongside the role the holding plays in your target allocation.
How do different bond exposures compare?
“Bonds” are not a single risk category. Consider the features below when evaluating an existing holding or a possible adjustment; the comparison is general, and actual risk depends on the security or fund.
| Exposure | Rate sensitivity and income | Other risks to check |
|---|---|---|
| Fixed-rate bonds | Market prices generally fall when comparable yields rise. Longer maturity and lower coupon generally mean greater sensitivity when comparing otherwise similar bonds. | Credit or default, inflation, liquidity, and call risk can apply. |
| Floating-rate bonds | Coupon payments reset according to the security’s terms, so income can respond differently from a fixed coupon. | Floating rates do not remove credit, liquidity, or other investment risks. |
| Treasury Inflation-Protected Securities (TIPS) | Principal adjusts with changes in the Consumer Price Index (CPI), unlike nominal fixed-principal Treasury securities. Their market prices can still change with interest rates. | Price and liquidity risk remain; CPI adjustment does not guarantee a gain if sold before maturity. |
| Municipal bonds | Rate exposure depends on the bond’s terms, including maturity and coupon. | Interest generally receives federal tax exemption and may also be exempt from state and local tax in the issuer’s state; treatment depends on the security and the investor’s circumstances. Credit, liquidity, and call risks also matter. |
| Corporate bonds | Rate exposure depends on the bond’s terms, including maturity and coupon. | Issuer credit and default risk are central alongside rate, inflation, liquidity, and possible call risks. |
The SEC’s bond FAQ and corporate bond bulletin describe these differences. Tax treatment depends on the bond and the investor; check the relevant terms and seek qualified tax advice when needed.
Should you change your stock, bond, and cash allocation?
Start with your own investment horizon, goal, risk tolerance, and financial circumstances—not a rate headline. The appropriate allocation is personal: a near-term spending goal, a long-term goal, and different capacities for loss can call for different mixes. Investor.gov’s asset allocation guidance explains these factors.
Rising rates do not establish a universal reason to add cash, reduce bonds, or shift into stocks. A strategic allocation is a plan for balancing categories of assets over time; changing it to predict the next rate move is market timing and can leave the portfolio out of step with the goal it was built to serve.
Diversify both across asset categories and within them. A fund or ETF is not necessarily diversified if it focuses narrowly on one sector or type of security, and funds can hold overlapping investments. Review holdings rather than relying on a product label alone.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How should you rebalance investments?
Rebalancing brings a portfolio back toward an allocation you chose in advance after market movements cause it to drift. It is different from changing the target allocation because you expect rates to move in a particular direction. Investor.gov and the SEC describe calendar-based reviews and threshold-based reviews as possible approaches, and note that rebalancing tends to work best relatively infrequently.
- Set or confirm your target allocation. Base it on your goal, horizon, risk tolerance, and financial circumstances—not the latest rate forecast.
- Choose a review rule. You might review on a calendar, such as every six or twelve months, or when an asset category moves beyond a threshold you selected in advance. These are examples, not mandatory intervals or thresholds.
- Compare current holdings with the target. Look at the whole portfolio, including overlapping funds and the bond exposures within them.
- Make only the adjustment needed to follow the rule. Before trading, consider transaction costs and taxes, particularly in taxable accounts. Tax consequences depend on the specific investment and your circumstances.
The SEC’s beginner’s guide to asset allocation and diversification discusses allocation and rebalancing. A planned review process can help distinguish maintenance of a portfolio from a bet on where interest rates go next.
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