By Beth Pinsker
You want income in retirement, but soaring bond yields can be risky.
A soaring stock market is not hard to understand. The trajectory is in one direction. If you buy a share in a company or an index fund at $10 and it goes up to $20, you’ve gotten richer. End of story.
The same thing does not happen in the bond market, which is why recent headlines about soaring bond yields have financial experts running around like Chicken Little.
Is the sky falling for you, though? Retirees are always hungry for yield and typically have a high proportion of bonds in their portfolios – at least 50%, more commonly 70% to 80%. Given recent stock-market volatility, some have pulled out of equities altogether and have been waiting for their next move. Rising bond yields might sound tempting. Getting a 4% to 5% guaranteed return on a CD, TIPS or a Treasury bill (or even more on a corporate bond) is better than the 2% that the S&P 500 SPX has now managed to gain in 2025 as of June 4, and much better than the stock market’s negative year-to-date return of a few weeks ago. But still people hesitate because bonds are a complicated investment with two main components: price and yield.
“Retail investors are still traumatized from the 2022 bond market,” said Alex Caswell, a certified financial planner from San Francisco, when the aggregate bond index had its worst year, with returns down 13%. “Anything that can lose its value is deemed a risk. While those concerns are not necessarily valid, they create a harder conversation around bonds despite the increasing yield.”
Why bonds aren’t an easy answer
Bonds are a seesaw. When yields go up, prices go down. All sorts of economic indicators are tied to the board, and they get dragged along for the ride: inflation, interest rates, government debt. There are no true winners on either side – and no big plus for equilibrium, either. Sometimes you will do better when yields rise, depending on your circumstances, and sometimes you would be better off if they were lower.
All the fuss over the current surge in bond yields is getting economists and financial advisers worried about negative long-term economic impacts. That matters for the small investor because bonds are typically a longer-term decision for them, or at least middle-term. If you’re a retiree building a bond ladder, you’re thinking in terms of years, not three-month increments. And you’re investing very important money that you need, with small margins for error, while institutions are talking about billions with a rolling time frame.
“We advise caution,” said John Ulin, a financial adviser from Boca Raton, Fla. “The bond market has faced significant headwinds over the past five years, with intermediate- and long-term bonds underperforming and failing to deliver the downside protection they historically provided during economic stress. Despite a cooling in inflation, factors such as ongoing tariff wars could reignite inflationary pressures, further eroding bond valuations.”
What’s the best strategy?
If you’re trying to balance all of these priorities, it can get confusing. If stocks feel too risky, you’re supposed to be able to flee to the safety of bonds. But when bonds feel risky, too, what should you do?
What Ulin means by caution is to “prioritize stability and downside protection over chasing yield.” That means clients who are at or near retirement shift from higher stock-market allocations to at least a 60/40 portfolio – Ulin urged this at the beginning of the year, before the April downturn. “This rebalancing was as much a response to the significant stock-market gains over the past couple of years as it was a strategic move to de-risk ahead of retirement.”
For now, he is recommending high-quality, short-duration bond ETFs and funds. “These instruments offer a more attractive risk/return profile in the current environment and are less sensitive to interest-rate fluctuations, helping to mitigate potential volatility in a rising-rate scenario,” he said.
Interest-rate risk matters to retirees, because if you are drawn to shorter-term investments to boost your returns – taking a 6-month Treasury bill instead of a 2-year note, for instance, or inflation-protected TIPS in the same denominations – what are you going to do then when the bond comes due? You won’t find good prices to sell early on the secondary market, and your next options will cost more. And, if you’re not buying directly and holding, then what happens to your bond index fund in that short time frame? As yields rise, prices will drop, and your fund will lose money. If you go to cash it out to pay your living expenses, you’ll have less than you had hoped. Yet, even with this downside, they might be the best option at hand in difficult times.
Deva Panambur, a certified financial planner from West New York, N.J., is a bit more conservative regarding the interest-rate risk of short-term investments.
“Currently, the yield to maturity of intermediate bonds, around 4.5%, is a good proportion of long-term returns of stocks, while also providing a ballast to the portfolio,” he said. “While bonds have lower volatility than stocks, they are not riskless. Therefore for clients that need cash, such as retired clients, I am keeping significant cash in the portfolios.
You can also spread this risk around. “We add bond ladders or fixed-date bond funds and hold to maturity to reduce the uncertainty of bond values at the time the client needs the cash,” said Peggy McGillin, a CFP from Concord, Mass.
Even if the sky is falling on the bond market, you should consider staying invested in bonds in some capacity and not fleeing for cash, especially given rising inflation. The bond seesaw is a positive in that sense: If you hold bonds to maturity, they will produce a guaranteed yield, and you can count on that for retirement income.
-Beth Pinsker
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06-06-25 1318ET
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