Question

If an investor or portfolio manager is expecting interest rates to increase why would he/she want to hold bonds at all?

Answer 1

If an investor or portfolio manager is expecting interest rate to increase , it will mean that bond prices will be falling in order to resdjust with the increasing interest rate.

When the interest rate will be rising, it will mean that Bond yields are going to rise, but, bond prices are going to fall, so the overall net impact on the bond repayment at the maturity will be same.

Investors will still be holding bonds in his portfolio because-

A.it will be offering them with diversification in the Asset class because they will not likely to get complete exposure in equity as it will be risky

B. it will also mean that there is a high demand and high inflation like scenario in the economy and there would be a risk also associated with such inflationary situations and Bond are completed defensive kind of asset class so they will be providing them with hedge.

C. The overall impact of interest rising on payment of the bonds at the maturity will still be NIL if the company has better credit repayment ability, so they will just be losing on opportunity cost.

D.in such inflationary situations, Bond are considered highly defensive and it will be protecting against the downside risk of the stocks.

So it can be said that due to these reasons, an investor will still be holding bonds in his portfolio when the interest rates are rising.