How Changes in Bond Rates Affect Fixed-Income ETFs | ETF Trends

Slowly but surely, interest rates are moving higher after hitting historic lows last year during the height of market volatility. Now, more exchange traded fund investors are wondering how the change will affect their fixed-income portfolios.

At the start of March, yields on 10-year Treasuries were hovering around 2%, but positive data, including an improving U.S. economy, debt exchange in Greece and increased investor optimism, has diminished the demand for safe-haven Treasuries, which raised interest rates in the process, writes Matt Tucker, CFA, Managing Director at iShares. Yields on 10-year Treasury notes are currently at around 2.18%.

“This is a fairly meaningful move over a short period, and it prompted many of our clients to reach out to us with questions about what rising interest rates might mean for their fixed income ETF holdings,” Tucker said.

If interest rates rise, traditional bond holders would either hold onto a security until maturity or sell now at a loss.

In comparison, most fixed-income ETFs do not mature. ETFs have a “maturity range” that they target, or follow a specific basket of bond maturities and rebalance their portfolios as bond holdings mature to achieve their time mandate. [Afraid of Rising Rates? — Consider These Bond ETFs]