Retiree do's and don'ts in a rising-rate environment

Rising rates aren't an unmitigated evil for your finances and portfolio, but some perspective is in order.

Christine Benz 20 July, 2018 | 5:00PM

The Bank of Canada raised interest rates last Wednesday, bringing its overnight rate up to 1.5%, and indicated that it expects rates to continue to move up. This marks the fourth increase in 12 months for the key policy rate, which is now at its highest level since 2008. In a statement, the Bank noted the strength of the global economy, including "stronger than expected" growth in the United States, while highlighting its belief that inflation in Canada was under control at around the 2% level.

Many market participants, especially retirees with fixed-income-heavy investment mixes, are reasonably concerned about what a period of rising interest rates could mean for their portfolios and for the rest of their financial lives. Will the bond market, which has experienced declining yields but enormous price appreciation over the past three decades, reverse course? Will the losses that bond investors have experienced over the past year persist, making bonds a lost cause (or worse) in the decade(s) ahead?

I think a more nuanced take is in order. Yes, higher yields have the potential to depress bond prices in the near term. Over time, however, they're apt to have a benefit for retirees, because income contributes the largest share of the return that bond investors earn. We've already started to see higher yields accruing to investors in search of income: Even as many bond-fund types have seen flat returns so far in 2018, the yield on the FTSE TMX Canada Universe Bond Index is now around 2.7%, and cash yields have also been climbing steadily.

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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