CHICAGO (Reuters) – For years, the conventional wisdom has been that rising interest rates are no friend of the stock market. A combination of higher costs of borrowing and potential inflation can be a one-two punch for companies and consumers.
But rising rates and stock prices happen more often than investors know, and they can herald brighter economic fortunes in the short term. There are ways to invest in both without getting burned.
This duet has had some off-key news of late because of fears that the U.S. Federal Reserve will curtail its bond-buying program: Bond yields have been rising over the past few months, which depresses bond prices. This has caused a minor shock to income-oriented investors.
The 30-year bond yield has risen from 2.7 percent in June 2012 to around 3.6 percent recently, according to the Federal Reserve. This increase of more than 33 percent hurts those who are not holding bonds to maturity or who invested in long-maturity bond funds.
For example, falling bond prices have driven the plain-vanilla, diversified Vanguard Total Bond Market Exchange-Traded Fund down 2.5 percent in the three months ended on Monday and more than 2 percent year to date, negating its 2 percent yield. The fund tracks an index of most U.S. bonds and charges 0.10 percent annually for management expenses.