Ask Matt: Can bond investors benefit from higher rates?

Q: Can bond investors benefit from higher rates?

A: It’s a law of finance: Higher interest rates hurt bond prices. But interestingly, bond investors can still benefit from higher rates.

A bond’s price and its yield is like a teeter-totter: When one goes up, the other goes down. The election has been a reminder of this.

Fearing higher inflation, investors have sold Treasuries, pushing down bond prices and increasing yields. The yield on the 10-year Treasury hit 2.39%, up dramatically from the 1.83% yield at the end of October. That’s caused a hit in bond prices. The Bloomberg Barclays Aggregate bond index has dropped 2.8% since late October. For bond investors who don’t have much tolerance for losses, that’s an unwelcome decline.

But there’s actually a bright side to all this for investors.

Bonds that have matured can be replaced with newer ones that pay higher prevailing interest rates. This holds true with bond mutual funds that hold baskets of fixed-income securities, too.

Cash generated by bonds that have matured can be reinvested in new issues carrying higher rates. Bond investors who have properly diversified their holdings, to include those with short maturities, could soon see their yields rise.

Paste BN markets reporter Matt Krantz answers a different reader question twice a week. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.