Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Bond investing as rates rise

Last week, Jim McKay argued there is limited appeal of investing in developed country bonds, where real interest rates (nominal interest rates less inflation) currently provide little, or even a negative, return to bond holders.

Warren Bird, formerly Co-Head of Global Fixed Interest and Credit at Colonial First State Global Asset Management, responds:

Of course you could accept the fact that rising yields produce higher returns and just relax. I've been writing and speaking for 20 years about the misplaced fear of rising bond yields. It's a simple message: fixed interest investing is all about the interest you earn. As yields go up, you get to reinvest income or maturing bonds at those higher yields, which ratchets up your interest earnings. Bond price volatility is just that - volatility.

The best example is the return from Australian bonds to investors who entered the market just before the sell off in 1994. They bought a portfolio yielding about 6%. Over the next 3 years they actually earned 8% pa. How, when 1994 was so terrible? Well, although they earned about -5% in 1994, the reinvestment income from putting maturing money back to work at 9, 10 and 11% lifted the returns during 1995 and 1996. Yields were back around 6% after 3 years, so there's no capital gain involved - just higher reinvestment earnings. If the bear market of 1994 hadn't happened, then returns over the 3 years to 1997 would have been lower, at around 6% pa.

There's a very good reason why fund managers advise you to look at investing in bonds over a 3-5 year time frame. Because that's when the short term volatility of bond prices mostly washes out and you earn the income you expect to when you make your investment.

Sure, if you knew that a rise in yields was coming you would be sensible to shorten up your duration, avoid the mark to market loss, and then put your money back into those higher yields. But can we be so sure that yields must rise from now? They've already backed up by well over 1% during 2013 and frankly a ten year government guaranteed income stream of 4.25% pa, that will rise if yields go up, doesn't actually look too bad if you have even the slightest concerns about the health of the world economy.

Therefore, I believe that a perfectly valid strategy in a rising yield environment is simply to reinvest your cash flows and enjoy the higher returns you end up earning.

  •   3 December 2013
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Your bond questions answered

banner

Most viewed in recent weeks

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

It’s economic reality, not fear-based momentum, driving gold higher

Most commentary on gold's recent record highs focus on it being the product of fear or speculative momentum. That's ignoring the deeper structural drivers at play. 

Latest Updates

Property

The 5% deposit scheme is bad for homeowners and Australia

An ‘affordability’ scheme making the county more vulnerable to economic shocks and contributing to the deteriorating financial situation of everyday Australians.

Investment strategies

Is defensive the new offensive?

Relatively boring, unglamorous, defensive stocks like Kroger and Allstate have quietly outperformed gilded tech giants, offering steady growth, visibility, and resilient returns in a market captivated by AI and flashier industries.

Shares

How the RBA scores on its inflation goal

The Reserve Bank continues to face criticism from all sides. A reminder of the RBA's mandate and a review of their track record in maintaining price stability since the early 1990s.

Investment strategies

Levered credit: A late cycle ingredient for drawdown pain

As credit spreads normalised through 2025, yield‑hungry investors have turned to leverage for high returns, uncomfortably echoing pre‑GFC behaviours. Investors need to be careful to understand the true risk‑return trade‑off.

Planning

The more things change… longevity just goes on increasing

Australia needs a major shift in longevity awareness, attitudes and behaviour if, as a community, we are to reap the benefits of increasing longevity. Adopting a national strategy is well overdue.

Property

The improving outlook of Australian commercial real estate

The sector is positioned to benefit from defensive and resilient income streams supported by embedded rental increase opportunities. 

Property

Seize hidden opportunities among 50+ home buyer schemes in Australia

There is a laundry list of government schemes to help Australian's struggling with housing affordability. Savvy buyers should take advantage to break into the property market.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.