INVESTMENT INSIGHT
Interest rates drive bond returns
Interest rate volatility can take a toll on your bond portfolio if not managed properly. With interest rates expected to rise, the value of your bond portfolio
could deteriorate. It’s critical to maintain both a flexible and highly-diversified fixed income portfolio to avoid the pitfalls associated with a low-rate, lowreturn environment.
Even a small rise in rates can lead to losses
+1%
When interest
rates rise
Traditional core
bonds at risk
Avg duration:
5 years
Bond values fall
-5%
For illustrative purposes only.
The concept of duration is important because it determines how sensitive the value of your bonds are to changes in interest rates. For example, if the
duration of your fixed income portfolio is 5 years and interest rates rise by 1%, the value of your bonds could fall by 5%. Implementing a flexible, diversified
strategy is critical in helping to mitigate interest rate risk in your portfolio.
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Fixed income performance when interest rates rise
Non-traditional bonds, bank loans and high yield bonds have provided higher returns in rising interest rate environments.
Bond returns during periods of rising interest rates (periods when rates rose 2%+ during last 30 years)
Rising rate
time period
Change in
interest rate
Nontraditional
bond
Bank loan
High yield
bond
Multi-sector
bond
Short-term
bond
Inflationprotected
bond
Traditional
core bonds
Intermediategovernment
bond
Longgovernment
bond
8/86 – 10/87
+3.31
­–
­–
1.64
2.31
2.98
­–
2.41
1.83
-2.48
9/93 – 11/94
+2.86
–
6.29
0.83
-1.16
-0.16
-1.65
-3.03
-3.93
-7.87
9/98 – 1/00
+2.63
8.48
6.23
5.71
3.33
2.01
1.67
-0.61
-1.36
-6.47
5/03 – 6/07
+2.19
5.31
6.13
8.97
5.94
2.29
2.70
2.94
2.09
1.29
Average
+2.75
6.89
6.22
4.29
2.60
1.78
0.91
0.43
-0.34
-3.88
Average return during
rising rate periods
8%
6.89
6.22
4.29
4
2.60
1.78
0
0.91
0.43
-0.34
-4
-3.88
Sources: BlackRock; Barclays; Bloomberg; Lipper. Rate spike time periods are 8/31/86-10/31/87, 9/30/93-11/30/94, 9/30/98-1/31/00, 5/31/03-6/30/07, respectively. Past performance does not guarantee future results. Interest Rates represented
by the 10-year US Treasury. All categories above represented by Morningstar Mutual Fund categories with the exception of Traditional Core Bonds which is represented by the BBG Barclays U.S. Aggregate Bond Index. The nontraditional bond, bank
loan and inflation-protected bond Morningstar categories did not exist during certain rising rate periods, as noted by the blank return value. Index performance shown for illustrative purposes only. You cannot invest directly in an index.
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Investing involves risk, including possible loss of principal. Past performance does not guarantee future results.
Important Risks: Bond values fluctuate in price so the value of your investment can go down depending on market conditions. Fixed income risks include interest-rate and
credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make
principal and interest payments.
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Prepared by BlackRock Investments, LLC, member FINRA.
Not FDIC Insured • May Lose Value • No Bank Guarantee
LIT. NO. INT-RATES-FS-0417
008228A-0417
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