The benefits of rising interest rates
05 May 2017 | Markets and Economy
When yields rise, capital values fall, but rising yields also bring benefits to fixed income investors. Rachel Baxter interviews Paul Malloy, head of fixed income, Vanguard Europe.
Rachel Baxter (moderator): The benefits of rising interest rates. When yields rise, capital values fall, but rising yields also bring benefits to fixed income investors. My name is Rachel Baxter. I have with me Paul Malloy, Head of Fixed Income at Vanguard Europe.
Paul, how will investors benefit from rising yields?
Paul Malloy (head of fixed income, Vanguard Europe): An important characteristic of fixed income securities is the coupon payment and the maturity payments. As yields rise, investors will be able to reinvest those coupon payments and maturity payments at higher yields and then realise that higher yield over their longer term investment horizon.
Rachel Baxter: And the other aspect of fixed income is the ability to reduce volatility in a portfolio, so how will that be impacted by rising interest rates?
Paul Malloy: Generally speaking, the outright level of yield and the portfolio dampening characteristics of fixed income are broadly independent of one another, so investors will be able to benefit from the diversification benefits as well as get the additional yield associated with the rise in yields over the term of the investment.
Rachel Baxter: Some investors may see a decline in capital values in the shorter to medium-term, but rising yields will also bring benefits to investors looking to bonds for income and longer-term capital protection.
Paul Malloy, thank you very much.
Paul Malloy: Thank you.
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