Rising interest rates don’t always sabotage longer term bond returns
Even if you think we’re headed into an extended period of 1970s-like stagflation, you should stick with your bondholdings.
How can this be? The answer traces to the mechanics of what’s known as a bond ladder, which is a portfolio of bonds that is managed to maintain a constant duration. Most bond mutual funds and ETFs employ ladders, which means they reinvest in longer-dated bonds the proceeds of ones that have matured—thereby maintaining the average duration of the bonds they own.
This despite interest rates today being markedly higher today than then. A naive bond investor who didn’t appreciate what the researchers found about bond ladders would therefore expect that the VGIT would have produced a large loss over this 10-year period.
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