Rates Up, Bonds Down: What Changed in Your Portfolio (and Why)
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A quick overview of what happened in Sunnybranch client portfolios last week and how we're responding to changing macroeconomic conditions in the bond market.
Worried your advisor isn't paying attention like this? Reach out to Katherine to see how your portfolio is positioned to weather market volatility as we wrap up 2026 and move into 2027.
Transcript:
I just want to check in with y’all because you might have noticed some emails with trade confirmations come through last week. This video is to walk you through exactly what I did, how I’m thinking about your portfolio right now, and what I’m focusing on in the macroeconomic markets in the last quarter of 2026 and into 2027.
Let’s start with the big picture. If you’ve been watching the news over the past several weeks, you’ve probably seen some headlines about the bond market.
Bonds have seen increased volatility due to a variety of factors: persistent inflation in the US, energy prices across the globe, and increased debt issuance from both countries and corporations. Last month, the Federal Reserve raised interest rates and signaled that they are expecting to increase rates another quarter point before the end of 2026.
How Do Rising Interest Rates Affect Bond Prices?
And here’s why that matters for bonds and for your portfolio. When interest rates go up, the price of existing bonds goes down.
It’s an inverse relationship, just like a seesaw on the playground. Knowing the relationship between interest rates and bonds is important, but understanding the why of it is even more important.
Why Do Existing Bonds Lose Value When Interest Rates Rise?
So imagine you own a $10,000 bond that pays 3%. You’ll receive $300 a year if you own that bond.
Then new $10,000 bonds come out that pay 4% interest per year because interest rates are rising. Suddenly, nobody wants your 3% bond anymore unless you sell it at a discount.
Because why would they pay that same $10,000 sticker price for an interest payment that’s 1% less than new bonds that they can get? So as interest rates rise, the value of the bonds that you already own drops.
Why Is the Bond Portion of My Portfolio Down Right Now?
That’s exactly what’s happening right now. And it means that the bond portion of your portfolio is down.
These are the macro factors that I’ve been watching across the past few weeks and the primary forces that drove the trades that I put through in your portfolio. The overarching goal of these trades was to shorten the duration of your bond holdings.
What Is Bond Duration, and Why Does It Matter for Investors?
Quick vocab lesson: duration is the length of time until the bond that you own pays you back. So a 10-year bond has a 10-year duration.
A two-year bond has a two-year duration. On the fund side, a medium-term bond fund tends to have an average duration of between five and seven years.
And the thing to understand about duration is that the longer the duration of a bond or a bond fund, the more sensitive it is to interest rates rising and what the market thinks will happen to interest rates in the future.
Why Are Long-Duration Bonds Riskier When Interest Rates Rise?
Because if I have a 10-year bond with a 3% interest rate and the market thinks rates will increase, the value of my bond is going to drop because the expectation is that you will continue to be able to buy new 10-year bonds in the future that have higher rates than my coupon or interest rate of 3%.
So the key point to understand is that if rates keep rising, longer duration bonds will continue to lose value, and they will lose value more quickly than shorter duration bonds, which are exposed to less interest rate risk.
Should You Move to Short-Duration Bonds in a Rising Interest Rate Environment?
So, with the trades I put through last week, I shifted your portfolio into shorter duration bonds to take some price volatility off the table. Bonds are intended to be the stability portion of your portfolio.
The goal is to solidify that stability in a rising interest rate environment. This was not a major shift in your portfolio allocation or a tactical change from your overall stock-to-bond weighting.
This was a focused move on the bond side of your portfolio, with the goal of reducing portfolio volatility over the coming months.
How Does Tax-Loss Harvesting Work When Bond Prices Fall?
There’s also a side benefit for those of you with taxable brokerage accounts, not IRAs or Roth IRAs. Because bond prices are down, it created an opportunity for tax-loss harvesting.
By selling your bond funds that had losses, we were able to bank those losses to offset current or future realized capital gains. And even if you don’t have capital gains this year, these losses can be carried forward indefinitely on your tax return to reduce the amount of capital gains tax you pay in the future.
What Should Investors Expect From Interest Rates and Bonds Heading Into 2027?
So to sum it all up, rates are rising, bond prices are falling, and in response to this, I moved your portfolio into shorter duration bonds to reduce your overall exposure to bond price volatility. In taxable accounts, these trades also picked up some tax losses along the way for many of you.
In terms of what’s coming next, I am watching macroeconomic conditions very closely as we close out 2026 and head into 2027. When interest rates settle down and we have a clear picture of where things are landing on the rate side, I will reevaluate and adjust your portfolio and your bond holdings as needed.
As always, if you have any questions, just reach out. You’ll be getting your insurance summary and an invitation to schedule your end-of-year review call later this week.
And if you’d like to add a more in-depth discussion of your portfolio to that call, just let me know. I look forward to talking soon.
Let’s take the next step together
Understanding how to protect, invest, grow, and/or give away a multi-million dollar inheritance isn’t easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, reach out to Katherine Fox, CFP® and CAP®, financial planner for inheritors, to learn how Sunnybranch can help you evaluate your financial situation and build a plan for your financial future.
