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

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Lithium's rally is real this time – but no-one trusts it

The lithium rally mirrors the early-2010s tech stock surge, with demand set to double by 2030. Supply has been slow to respond, creating a market deficit for future tech like humanoid robotics and solid-state batteries.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

How inflation is quietly moving the goalposts on retirement

Inflation doesn’t just raise today’s bills - it quietly increases the amount needed to retire, while simultaneously making it harder to save. Three steps to take before June 30th to improve retirement outcomes.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Latest Updates

SMSF strategies

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

Planning

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Taxation

Income tax and bracket creep

Examining how five "tax cuts" stack up against bracket creep. Why offsets and incremental changes may do little to ease rising average tax burdens, compared to structural reform through indexation over time.  

Exchange traded products

The limits of a quality investing approach in Australia

Quality strategies shine globally, but Australia's concentrated market tells a different story. Limited diversification and sector dominance can constrain the defensive outcomes investors have seen in broader markets.

Investment strategies

Balancing opportunity and complexity

As private markets expand, investors face a growing mix of structures, a stabilising private equity cycle and uneven AI disruption. Fresh questions are being raised about where the real opportunities now sit.

Investment strategies

Why strong returns matter as much as generosity

As EOFY approaches, structured giving offers a tax-effective way to support charities, while allowing donations to grow over time and play a longer-term role in family wealth and legacy planning outcomes.

Investment strategies

The most important investment decision you’ll ever make

Stock picking often gets the spotlight, but research shows asset allocation explains the vast majority of long‑term returns. Understanding your mix of growth and defensive assets is the real key to investment success.

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.