Why Your Conservative Money Lost Money

By: Jack Strulowitz

Last month the Federal Reserve raised interest rates for the first time in three years, and the yield on the 10-year Treasury climbed to a level not seen in nearly a quarter century. If you opened your statement and found that the bond side of your account went down, you were in good company. It probably came as a surprise, because bonds are supposed to be the part of the portfolio that sits still while stocks do the moving, and very few people were ever told how a bond can lose money when nobody defaulted on anything.

The Fed rate you hear about on the news is the rate banks charge each other to borrow overnight, and the Fed sets a target for it. It matters because it is essentially the base price of money in the economy. The rate on your savings account, your car loan, your credit card and most business borrowing gets priced off of it, which is why markets react to every hint about where it is headed. When you hear that the Fed raised rates by 25 basis points, that simply means a quarter of a percent. But the Fed only controls the shortest rates. It does not set the rate on a 10-year Treasury or a 30-year mortgage.

The Fed raised its rate by a quarter of a percent in September, while the 10-year Treasury climbed more than twice that over the same month. Long-term rates are set by investors, and investors look ahead. With inflation and energy prices running hotter than anyone would like, bond investors had already pushed long-term yields to multi-year highs before the Fed even sat down to vote. Once the hike came and the Fed signaled that more could follow, yields kept right on climbing. The bond market prices in where it thinks rates are headed, which is why it so often moves well before the Fed and well beyond it.

Mortgage rates track the 10-year Treasury much more closely than they track the Fed, so as the 10-year climbed, mortgage rates went with it, and the average 30-year mortgage recently crossed 7% for the first time since early 2025. Anyone buying a home, refinancing, or helping a child buy one has felt this without owning a single bond.

By historical standards, though, today’s rates are not especially high. For more than a decade after the 2008 financial crisis, rates sat at or near historic lows, and the Fed had only nudged its rate up to around one-and-a-half percent when Covid arrived and it cut back to zero. The 10-year Treasury bottomed at about half a percent in August 2020, and the average 30-year mortgage hit a record low of 2.65% in January 2021. Then inflation arrived, and in 2022 the Fed raised rates faster than at any point in the prior four decades, giving bonds one of their worst years on record. An entire generation of borrowers and investors formed their sense of normal during this stretch, so today’s rates feel steep, even though mortgages peaked above 18% in 1981.

So why does a bond you already own lose value when rates go up? Think of a building with a tenant locked into a ten-year lease at today’s rent. If rents in the area jump next year, that building is worth less to a buyer, because whoever buys it is stuck collecting the old, lower rent for the rest of the lease. A bond works the same way. If you own a bond paying 3% and new bonds start paying 5%, nobody will pay you full price for yours, so its market price drops until the math evens out.

The lease also explains why some bonds fell much more than others. A building with one year left on its lease barely gets discounted, since the owner will be charging market rent again soon. A building with ten years left gets discounted heavily. Bonds behave the same way: the longer a bond has until it matures, the longer you are locked into the old rate, and the more its price falls when rates rise.

None of this means bonds have stopped doing their job. Over time, bonds have offered investors less growth than stocks along with less volatility and reliable income, and one difficult quarter does not change that. And the same rise in rates that pushed down the price of existing bonds means new bonds now pay more than they have in over two decades. For anyone who relies on their portfolio for income, that is good news. The landlord stuck with the old lease takes a hit, but the next lease gets signed at the higher rent.

Nobody knows where rates will go from here. The Fed has signaled it may raise them again, but you do not need to predict that to make sound decisions. The more useful question is whether the bonds you own match when you will actually need the money. That question is much easier to answer before the next move in rates than after it, and it is a good place to start a conversation about what is sitting on the bond side of your account. n

Jack Strulowitz is a Financial Advisor at Bernath & Rosenberg in Cedarhurst, NY, where he helps high–net worth individuals and families manage their investments and build comprehensive strategies for retirement, tax, and estate planning. For questions or to schedule a consultation, please contact [email protected] or 847-962-3352.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.