**Your investment horizon matters**

Rising interest rates can be good for bond investors if their investment horizon is long enough. **Figure 1** shows the effect of the investment horizon on a hypothetical investment in a bond maturing in 15 years that pays a coupon of 0.9% annually when interest rates are at 2%. The bond’s weighted average Macaulay duration is 14 years. (Macaulay duration is the weighted average time to receive coupon interest and principal payments that would allow the investor to recoup the bond’s price from its cash flows.)

It’s true that when the investment horizon is shorter than the bond’s duration, the decline in market price outstrips the benefit of higher yields on reinvested cash flow. As shown in Figure 1, over a period of 5 or 10 years, a rise in interest rates of 100 or 200 basis points results in a deterioration in total returns.

When the investment horizon is longer than the bond’s duration, however, higher yields on reinvested cash flow outweigh the market price decline. Over a period of 15, 20, or 25 years, interest rate rises of 100 and 200 basis points result in an improvement in total returns.

(The inverse is true for total returns when interest rates decline. For investment horizons shorter than the bond’s duration, total returns improve; for horizons longer than the bond’s duration, they deteriorate.)