4th Quarter 2026

Recently I got a call from my brother with a question I suspect many investors are asking right now. He politely asked, “Craig, why is the bond portion of my portfolio dropping so much in value?”

This past weekend the team had a tournament in Stockton. Unfortunately, not all the players were available, so some girls stepped into unfamiliar positions. They played hard, but mistakes that naturally come with playing out of position proved costly in a close game. 

I explained to him there are 3 main reasons why he, and most of you, are seeing the same thing. But before we got into the reasons, I first had to explain one of the most important concepts in bond investing: bond prices generally move in the opposite direction of interest rates. Well, what does that mean, he asked. So, I explained. Let’s say I own a 10-year treasury bond issued by the United States government that pays me 5%. And let’s also say you are interested in buying this US government bond from me. If newly issued 10-year U.S. Treasury bonds are paying 4%, you would have to pay me more than the face value of my 5% bond to make it worthwhile to sell it, because my bond is paying you a higher interest rate than what you can currently get elsewhere. Conversely, if the current 10-year interest rate on US Government bonds is 6%, I am going to have to discount the price of my bond, below face value, to entice you to buy my bond versus someone else’s. So, as I mentioned before: as interest rates go up, bond values drop and as interest rates drop, bond values increase. So here are three main reasons why interest rates are currently rising and bond prices are dropping:

1. 1.The National debt. As you all know the current United States debt is greater than $40 Trillion dollars*. Last year’s deficit was $1.78 trillion. This year’s deficit is projected to be between $1.9 and $2.1 trillion*. Every year Congress spends more money than it takes in and runs a deficit. It’s the equivalent of giving a teenager a credit card and saying to them, go ahead and buy anything you want. You can pay it back now or sometime in the future. And when you max out this card, don’t worry, we’ll get you another one to keep spending. When the government borrows this much, it must sell a lot of bonds. And to attract more buyers, it has to offer higher rates.
2. The second reason why interest rates are rising now is inflation. The war in Iran has increased oil, gas and diesel prices significantly. If it costs more to move goods from point A to point B, businesses will often pass some of those higher transportation costs on to consumers through higher prices. This inflates the cost of the product and creates inflation. When inflation runs hot, bond investors sell their bonds and/or demand higher yields.
3. The Federal Reserve. The Fed, as it is called in the industry, oversees short interest rate policy. They have two main objectives. 1) keep unemployment as low as possible and 2) keep inflation around 2%. As discussed before, inflation has been running much higher than 2% recently, so the Fed has started an interest rate rising policy to try and quell this inflation.

So, I explained all this to my brother and of course his follow up question, well is this good or bad for me? I told him, like everything in this world, there are positives and negatives to what’s going on. One benefit of higher rates is that individual bonds and bond funds will potentially generate more interest income. More interest income means more cash coming to you on a monthly, quarterly, semi-annual or annual basis. Another positive is if you are reinvesting cash, compounding your account will happen at a quicker pace because you are buying shares at lower prices with each interval.

The negatives to higher rates include higher mortgage rates for home buyers, higher interest rates for businesses looking to invest and expand, higher interest costs for the federal government and lastly the potential for a stock market decline sometime in the future. Because investors can earn more interest in a higher interest rate environment, stocks become less attractive on a risk adjusted basis.

As much as I’d love to predict when this interest rate hiking cycle will end, my faithful crystal ball has fogged up. From my years of experience, diversification can help investors navigate through market shifts. A well-diversified portfolio may include stocks, bonds, real estate, gold and cash. Let’s make sure your portfolio is well diversified so you can navigate through this rising interest rate environment.

The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. The (CMO, government bond fund, etc.) is backed by the full faith and credit of the US Government as to the timely payment of principal and interest. A diversified portfolio does not assure a profit or protect against loss in a declining market. The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete. This information is for educational purposes only. • These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.

*https://www.jec.senate.gov/public/index.cfm/republicans/debt-dashboard