What Higher Yields Mean for Your Portfolio and Plan

Key Takeaways

• Yields have been higher than they’ve been since 2007.
• The yield is the biggest part of the return that you earn as a bond investor. So, if starting yields are higher, then that will translate into a higher long-term return for you.
• As a bond-fund investor, if yields go up further from where they are today, you’ll experience a little bit of a bobble in your bond-fund price, but you’ll also be able to take advantage of those higher yields as they come online.
• As a cash investor, when yields change, unless you’ve locked in some very long-term CD, you’re going to see your yields go down if the prevailing yield environment goes down, or up if things get better.
• The big risk to bond investors today is inflation, and that is what the Fed is keeping an eye on.
• When yields are better, as they are today, that means that annuities can do better in terms of their payouts.
• Many people who have seasoned mortgages have much lower rates on those mortgages than they can earn on their safe securities. So the incentive really isn’t there to pay down a mortgage, whereas a couple of years ago, the incentive was very much there if you had a desire for a safe return on your money.

Margaret Giles: Hi, I’m Margaret Giles from Morningstar. Recent market developments have fueled concerns around inflation and potential recession, and elevated long-term Treasury yields have followed suit. Joining me to discuss the portfolio implications of rising yields is Christine Benz. Christine is Morningstar director of personal finance and retirement planning, and host of The Long View podcast. Christine, thanks for being here.

Christine Benz: Margaret, it’s great to see you.

Why Interest Rates Have Been High in 2025

Giles: So let’s talk about the prevailing interest rate environment. You note that yields have been higher than they’ve been since 2007. Why have rates gone up so much?

Benz: Well, it really goes back to the covid period when yields were very, very low in an effort to stimulate the economy. And then, of course, we had that spike of inflation beginning in mid-2021. And the Federal Reserve took very aggressive steps to help stamp out inflation, to help reduce it to a more palatable level of 2% to 3%.

So that’s why we are where we are now. The good news is that inflation does appear to be coming down fairly steadily, But the Fed has indicated that it intends to be watchful in the face of some of the tariffs that have been coming online, and of course, that’s been moving in fits and starts. But the Fed has indicated that it’s not inclined to be overly accommodative at this point until it sees further indications that lower inflation is here to stay.

So, here we are at much higher yields than we’ve had for many years, which is good news for bond investors, not so great news if you’re in the market for a mortgage.

Why High Yields Are Good for Bond Investors

Giles: Absolutely. So, bond prices have taken a little bit of a hit in recent months, but you point out that over the long term, high yields are a positive for bond investors, like you said. Why is that?

Benz: Well, the yield is the biggest part of the return that you earn as a bond investor. So, if starting yields are higher, then that will translate into a higher long-term return for you. And Margaret, you and I work on those annual compendium of return forecasts from various investment firms, including the team here at Morningstar, and what we’ve seen over the past several years is, a couple of years ago, the 10-year projection for high-quality bond returns was like 1%, 2%. Now it’s getting close to a livable income stream for retirees, where the projections are more in the neighborhood of 4% or even 5% for a high-quality bond portfolio. So there is a direct impact for bond investors.

Do Bond-Fund Investors Also Benefit From Higher Yields?

Giles: So, would the long-term benefit of those higher yields accrue only to bond investors, or would bond-fund investors also stand to benefit?

Benz: They both would stand to benefit, but when yields are as high as they are today, it can be an awfully good time to lock them in by buying a portfolio of individual bonds, perhaps laddered to meet your spending needs, because what you see is what you get in that case.

As a bond-fund investor, your return experience will be affected by the prevailing yield environment a little bit more. If yields go up further from where they are today, you’ll experience a little bit of a bobble in your bond-fund price, but you’ll also be able to take advantage of those higher yields as they come online. If you are a bond investor, you’re kind of stuck with whatever portfolio you’ve built. So, that’s something to bear in mind. I tend to be a little bit more on Team Bond Fund simply because of the simplicity of going out and building that portfolio of bonds. But when yields are as attractive as they are today, it can be a good time to lock it down with a laddered portfolio.

How Cash Investors Benefit From Higher Yields

Giles: Now, how are cash investors affected by higher yields?

Benz: Well, they definitely are the beneficiaries as well, but their returns experience will be more ephemeral because cash investments are very short-term investments. And so when yields change, when the prevailing interest rate environment changes, unless you’ve locked in some very long-term CD, like a five-year CD or something like that, you’re going to see your yields go down if the prevailing yield environment goes down, or up if things get better.

Why Inflation Is the Biggest Risk to Bond Investors Today

Giles: Are there any risk factors that bond investors should keep in mind today?

Benz: The big one is inflation, and that, I indicated, is what the Fed is keeping an eye on. Inflation is currently pretty benign. But I think you want to be careful not to overallocate to fixed-income investments, or certainly cash investments, because inflation is just going to gobble up a little bit of your purchasing power over time. So that’s the main reason, I would say, that investors need to not overallocate to cash or potentially should build in an allocation to inflation-protected bond securities to help address inflation risk directly.

Why Annuities Benefit From Higher Yields

Giles: Helpful to keep in mind. So you note that annuities also see a benefit when yields rise. Can you discuss that a little bit?

Benz: Right. So, with a simple income annuity, the insurance company behind it will be trusted with investing in a basket of securities that is designed to address the income that the annuity needs to pay out. So typically, it’s a basket of high-quality fixed-income securities. When yields are better, as they are today, that means that annuities can do better in terms of their payouts. So, all else equal, you’re better off buying an annuity today than you were a couple of years ago because the rates on high-quality securities are so much better.

How Higher Yields Affect Household Capital Allocation

Giles: Finally, you believe that higher yields have implications for how households allocate their capital. How so?

Benz: Well, I really like to talk about this, Margaret, because our portfolios aren’t our only opportunity set. We all have things that we’re doing with our money that goes beyond our portfolios. So many households have mortgages that they are paying down, even as they are saving and investing for the long haul.

So a few years ago, when interest rates were so low on safe securities, many investors, many people with mortgages had higher rates on those mortgages than they could earn on investing their money in safe assets. Today, we’ve seen a little bit of a flip-flop where many people who have seasoned mortgages have much lower rates on those mortgages than they can earn on their safe securities. So the incentive really isn’t there to pay down a mortgage, whereas a couple of years ago, the incentive was very much there if you had a desire for a safe return on your money. Prepay that mortgage, I would have said today, I think the advice is a little bit different.

Giles: All right, Christine, thanks for your insight and context on what these higher yields mean.

Benz: Thank you so much, Margaret.

Giles: I’m Margaret Giles from Morningstar. Thanks for watching.

Watch Is Your Asset Allocation Too Aggressive? for more from Christine Benz.