What is an impact of rising interest rates on bond portfolios?

When interest rates rise, bond portfolios typically experience a decrease in value. This relationship is primarily due to the inverse correlation between interest rates and bond prices. As interest rates increase, new bonds are issued with higher yields to attract investors. Existing bonds, which have lower yields, become less attractive in comparison. Consequently, to sell these older, lower-yielding bonds, investors must lower their prices, leading to a decline in the overall market value of bond portfolios.

This dynamic holds true regardless of the maturity or credit quality of the bonds, although the impact might be more pronounced for long-term bonds. Long-term bonds are particularly sensitive to interest rate changes because their cash flows stretch further into the future, making the present value of those cash flows more sensitive to changes in the discount rate (in this case, the interest rate). Therefore, when assessing the impact of rising interest rates on bond portfolios, it's clear that they tend to decrease in value.