[One-Minute Knowledge][Rising Interest Rates and Reassessment of Safe Assets] Bond Strategy in a Rising Interest Rate Environment: Can It Still Be Called a “Safe Asset”?

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Chapter 1: The Changing Concept of a “Safe Asset”

For a long time, the bond market has earned investors’ trust as a “safe asset.” In particular, U.S. Treasuries have established themselves as the “safest haven” in the global capital markets.
However, since 2022, rising inflation and the rapid rate hikes by central banks in response have begun to cast a shadow on that myth.

In the past, bonds were valued as a “hedge against stocks,” a source of stable income, and a low-volatility asset.
But as interest rates rose, prices fell sharply, and the U.S. bond market posted significant losses not seen in decades in 2022.
Many investors felt “betrayed” by bonds, a memory that remains fresh.

In such an environment, do bonds truly still qualify as “safe assets”?

This article delves deeply into the role and investability of bonds in a rising interest rate environment.

The Basic Relationship Between Bonds and Rates: Why Do Bond Prices Fall When Rates Rise

Inverse Relationship Between Bond Prices and Yields

Bond prices and interest rates move inversely.
When market rates rise, new issuances offer higher yields, making existing bonds appear overpriced and prompting sales.
Conversely, when rates fall, the yields on existing bonds become attractive, and prices rise.

This mechanism is the essence of the factors driving bond price fluctuations, and it is an inevitable phenomenon in a rising-rate environment.

The Duration Trap

The extent of bond price fluctuations largely depends on the duration, a measure of time until cash flows are received.
The longer the duration, the more sensitive a bond is to interest-rate changes, and the greater the price volatility. Consequently, long-term bonds suffer more from rate increases than short-term bonds.