With Rates Rising, Should I Be Concerned About My Bonds?
KEY TAKEAWAYS
- Rising interest rates push the market value of existing bonds down in the short term. The duration of your bonds or bond funds can be used to give you a ballpark for how much the market value might drop.
- Higher rates also mean higher income from your bonds over time. And when rates fall, bonds can gain value just when stocks are struggling, which is why they remain a key source of stability in a retirement portfolio.
- Common reactions, like selling to avoid the "loss," switching to individual bonds held to maturity, or moving to a money market, can feel safer but often don't change the economics and may work against your plan.
If you've looked at your statement lately and noticed your bonds are down, it's worth understanding what's actually going on before deciding whether to do anything about it.
Rising interest rates are back in the headlines as the Federal Reserve attempts to fight stubbornly high inflation that remains above its preferred Core PCE target level of 2.0%. As of the latest reading, the current inflation rate is at 3.3%, which is why the Fed raised the Federal Funds Rate by 0.25% at their last meeting to ease the pressure on prices. They’ve also set the stage for another 0.25% to 0.50% of increase in the future.
Markets had largely expected this, as can be seen by the 0.83% rise in the yield of the 10-year Treasury bond that began the year at 4.18% and now stands at 5.01% as of September 18, 2026.
For anyone in or near retirement, that raises a fair question: what does this mean for the bonds that are supposed to be the more steady part of my retirement portfolio? As retirement planning specialists, we hear this question a lot, and the answer is more reassuring than the headlines suggest.
How Do Interest Rates Affect the Bonds I Already Own?
When investors hear about rising rates, they immediately begin to worry about their bond holdings. When rates go up, the market value of your bonds goes down. The reason is relatively intuitive once you understand how bonds work.
When a bond is issued, it comes with a fixed interest rate that pays you a set amount, usually twice a year (called a coupon). That rate is locked in for the life of the bond, and it's based on what the market was paying at the time, given the issuer's credit quality. So when interest rates change, the market value of the bond changes too.
To better illustrate this, let’s say a company issues a five-year $1,000 bond with a 4% yield. You pay $1,000 to receive $20 coupon payments (4% x $1,000 / 2) semi-annually for the next five years and then get back your $1,000 at maturity. Let’s further say two years into this bond’s life, market rates have increased to 5%. This means a newly issued bond would now pay a $25 coupon payment (5% x $1,000 / 2) semi-annually.
So now if you wanted to sell this bond, why would anyone pay you the full $1,000 for a bond that only pays $20, when they could buy a new one paying $25? They wouldn't. Your bond's price has to drop until its return is competitive with what new bonds are paying. That's the reason behind the price decline you're seeing on your statement when you look at your bond holdings.
How Much Could My Bonds Actually Drop When Rates Rise? Meet Duration
There’s a way that you can estimate how much your bonds might decline in value when rates go up, and it’s called duration. Duration is just a fancy way of asking how long it takes for a bondholder to be made whole, and it is always a little less than the weighted average maturity of the bonds in the bond fund or index. But its practical use is also to tell you roughly how much a bond fund's value will drop for every 1% rise in interest rates.
We can look at the Bloomberg U.S. Aggregate Bond Index, a common benchmark for the overall U.S. bond market, as an example. The index’s duration was at 6.00 (5.98 to be exact) to start the year. So, if rates were to go up by 1.00%, you would expect the value of the index to decrease by 6.0% (6.00 duration x 1.00 rate increase).
Now let’s look at real numbers to see how things actually played out in the bond market so far in 2026:
- Starting yield: The Bloomberg U.S. Aggregate Bond Index began the year with a 4.32% yield. If there were no changes to interest rate expectations, you would expect a 4.32% return from the index for the year.
- How interest rates changed: The benchmark 10-year treasury yield had increased by 0.83% through mid-September 2026. The Bond index's yield rose a bit more, by 1.00% to 5.32%, since it also holds corporate and mortgage bonds whose yields don't always move in lockstep with Treasuries.
- Interest vs market value change: This means the index would have paid average interest of ~3.62% YTD [(4.32% + 5.32%) / 2) x 0.75 of the year]. Based on its duration, you'd expect the index's market value to fall by about 6.00% (6.00 duration x 1.00% rise in the index's yield).
- Estimated return YTD: A positive 3.62% from interest payments subtracted by a 6% decrease in the market value of the index would leave you with a −2.38% YTD (3.62% − 6.00%) return. The actual YTD return was −1.46%, better than the estimate, stemming from the timing of the actual interest rate increases skewed towards the more recent part of the year.
If you hold individual bonds, each bond has its own duration, based on how long it has left until maturity and how much interest it pays. The longer until it matures, the higher its duration, and the more its price will move when rates change. This is known as interest rate risk, and changing expectations about where rates are headed are the main reason bond prices move up and down.
If you hold a bond fund or bond ETF, the fund's duration is essentially a weighted average across all of its holdings. Because a fund can own hundreds or even thousands of bonds, the calculation behind that number is complex. But you don't have to run it yourself as it's typically listed on the fund's fact sheet.
Why Duration Matters for Your Retirement Portfolio
You can see from the example above that the magnitude of change in market value due to a change in rates is directly related to duration.
Just like stocks go up and down in value based on economic events, bonds can experience volatility too. It’s just that bond volatility is often much more muted than stock price volatility, which is why it is considered a less risky asset. Notice however that we do not use the term risk-free asset, because any investment is accompanied by some level of risk.
The bottom line is that just like you would not sell your stocks every time they went down in price, you should not make changes to your bond portfolio in response to price changes either. Price swings are a normal part of owning bonds, and reacting to every move can do more harm than the move itself.
Common Mistakes Investors Make When Rates Rise
1. Selling Your Bonds to Avoid the "Loss"
Seeing red on your statement can make it hard to stay patient. That's human nature. We tend to feel losses more sharply than equivalent gains, and it's easy to assume that if rates have been rising, they'll keep rising. Those instincts can make selling your bonds to avoid the 'loss' feel protective in the moment, even when it works against your plan. We explore these patterns in more detail in our Insight, The Psychology of Retirement: 7 Behavioral Biases That Can Increase Financial Stress.
2. Assuming You Can't Lose Money on Bonds Held to Maturity
Another reaction we see from investors, especially those who hold bond funds, is to switch to individual bonds and hold them until they mature. The thinking is that if you hold an individual bond to maturity, you won’t lose money because you're technically guaranteed to get your principal back (unless the issuer defaults). It feels safer, but it doesn't change the economics: if your bond pays 4% while new bonds pay 5%, you're still earning a below-market return. We explain this in more depth in The Illusion of Not Losing Money by Holding a Bond to Maturity.
3. Choosing a Money Market Over Bonds
And lastly, another common instinct is to move bond money into a money market fund until rates stop rising. Money markets can be a great place for short-term cash, and they're paying attractive yields right now. But those yields can drop quickly once the Fed starts cutting, and a money market won't give you the price increase bonds get when rates fall. We break down when each one makes sense in Money Market vs. Bonds: Which One Should You Use in Your Portfolio?
How Higher Rates Can Eventually Repay You
Rising rates aren’t all bad news. For starters, as rates go up, so too does the yield your bond fund pays. As older bonds with lower interest rates mature, new bonds are bought with higher current yields. This slowly increases the average yield on the fund until it becomes even with current market rates.
Higher yields mean higher interest payments that eventually more than make up for your temporary market value decrease caused by the higher rates in the first place. For retirees, this is the part of the story the headlines usually skip. The same rate increase that stings on your statement today is also raising the income your bonds will generate for years to come.
So What Happens to Bonds When Rates Come Down?
Just like stock price decreases can be followed by stock price increases, the same is true of bonds. Rates don’t always just go up, they come down too and that’s when bond investors get the other side of the trade. As long as inflation is under control, interest rates can come down.
When rates come down, you get to add a market value increase to the current yield your bond fund is paying that can make for a pretty sweet return. And this is also a reason why bonds are an important part of a well-diversified portfolio, as we expand on below.
Why Bonds Are Still an Important Part of a Retirement Portfolio
When the economy hits a soft patch, and economic growth starts to fall, stock prices can take a swift hit and correct. At this same time, interest rates can fall because slowing economies tend to cool inflation and the Federal Reserve can begin lowering rates to spur on economic growth.
As rates come down (often quickly in these cycles), the market value of your bonds increases at the same time your stocks fall. You can now sell some bonds, because they will be overweight in your portfolio, and use that money to buy stocks, which will have become underweight in your portfolio. You will then position yourself brilliantly for the eventual recovery in stock prices.
It's worth being honest that bonds and stocks don't always move in opposite directions. In periods of high inflation, like 2022, both can fall together. But over the long run, bonds remain one of the most reliable ways to add stability to a retirement portfolio.
For retirees, bonds do one more important job: they give you something steady to draw from when stocks are down. Instead of selling stocks at a loss to cover your spending, you can lean on your bonds and give your stocks time to recover. That's a big part of what lets you keep living your life, even when markets get rocky.
If you'd like a second opinion on how your bonds fit into your retirement income strategy, our retirement planning specialists are happy to walk through it with you. As flat-fee financial advisors, we don't earn more whether you hold bonds, cash, or stocks, so our only focus is what fits your plan. You can schedule a complimentary conversation and Thrive assessment here.
Frequently Asked Questions
How do rising interest rates impact my existing bond investments?
When rates rise, the market value of bonds you already own falls, because new bonds pay higher interest. How much they fall depends largely on duration: the higher the duration, the bigger the price swing. Over time, though, bond funds reinvest at higher rates, which increases the income they pay.
Should I adjust my bond portfolio if interest rates are expected to climb?
Not necessarily. A drop in bond prices usually isn't, on its own, a reason to make changes. Your bond holdings should reflect when you'll need the money and your overall retirement plan, not short-term rate headlines. It can be worth reviewing whether your bonds' duration fits your timeline, especially for money you'll spend in the next few years.
Can you lose money on bonds if you hold them to maturity?
If the issuer doesn't default, you'll get your principal back at maturity. But if rates have risen, you're still earning a below-market return for the rest of the bond's life, so the economic cost is the same. It just shows up as lower income instead of a lower price.
How do rising rates affect municipal bonds?
Municipal bonds follow the same basic rule: when rates rise, their prices fall, and longer-duration munis are affected more. Their tax-exempt income doesn't change that mechanic, but it can make them especially valuable for investors in higher tax brackets, so it may be worth weighing their after-tax yield against taxable alternatives.