The impact of changing interest rates depends on a few factors, including the pace and size of interest rate changes. Slow, incremental interest rate changes tend to have a more muted impact on fixed income returns than rapid, large changes.

Rising rates

Rising rates would help those in search of income. However, since bond prices and rates are inversely correlated, the benefit of rising income may be offset by falling bond prices. This could potentially dampen a bond’s total return below its stated coupon.

Remain the same

In a continued low rate environment, the returns of a traditional fixed income portfolio would be driven nearly entirely by income rather than a combination of income and price appreciation. Today, a diversified fixed income portfolio yields approximately 3.3%.1

Falling rates

As interest rates fall, bond prices rise. Rising bond prices could offset the decline in income or, depending on the pace and size of rate declines, potentially enhance a bond’s total return above its stated coupon. However, falling rates would further exacerbate the challenge of finding income going forward.

1 Bloomberg Barclays U.S. Aggregate Total Return Index yield-to-worst as of December 31, 2018.