What the bond rout means for your finances (Hint: It’s a mixed bag)

By Jeanne Sahadi, CNN

(CNN) — Rising bond yields have been causing plenty of consternation among fiscal hawks and investors, with good reason.

Higher bond yields make it more expensive for governments, companies and in some cases consumers to borrow. And they’ve been rising amid growing concerns over inflation and other economic and geopolitical issues.

So, yeah. It’s not great.

But also … not necessarily terrible for your money in all instances.

For example, if you have savings to invest? Higher bond yields are “unequivocally good news,” said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research.

Here’s a look at how today’s bond yields may affect your money in six different situations.

1. You already own individual bonds

When bond yields rise, their prices fall. And price-wise, longer-term bonds (like the 30-year Treasury) have taken the biggest hits.

So if you have to sell a bond before it reaches maturity you’ll probably get less than you paid for it plus you’ll be giving up the future income that bond promises to pay out.

But if you’re planning to hold your bond to maturity, any decline in price isn’t a concern. Nothing changes for you because you will continue to get paid the interest you were promised at the start.

And if you’re thinking of selling just to get a better yield elsewhere, you’ll have to do the math to see if it pays off.

Say you bought a 2-year Treasury bill at 3.4% at the end of February, Martin said. You have about 18 months left to maturity. But today you could get another 18-month bill for 4.3%. However, you’d lose some principal if you were to sell your current 2-year back into the market. And the extra yield you’d gain by buying a new 18-month bill at 4.3% likely wouldn’t compensate you enough to make the switch worth it.

“Net/net, you’re looking at a pretty similar return if you were to sell at a lower price and invest in the new, higher-yielding security,” Martin said.

But if you can afford to reinvest your money for another two years, you might do better buying a new 2-year bill at 4.4%. “If you consider slightly longer maturities (than what you own now), that’s where you can see the value. The longer you invest, the more the extra income you earn can offset that price decline,” he explained.

2. You want to buy a bond

See: “Unequivocal good news” above.

Prices have fallen and you’re getting to lock in a high yield for your money for the duration of the bond.

“It’s almost as if the bonds have gone on sale,” said Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth.

Shorter-term Treasuries are a good place to earn a very solid, low-risk return on money you’ll need for a near- or intermediate-term expenses (e.g., buying a home, college costs, etc.)

Or, if you have a financial plan and know what your end goal is, you may be able to “de-risk” your portfolio a bit (by putting more in bonds, less in stocks) if doing so would still let you meet your goal with less risk, Martin suggested.

3. You have a bond ladder

When you set up a bond ladder for a period of time – say, five years – you purchase bonds of different durations within that time frame. Every time a bond on your ladder matures, you take the proceeds and invest it in a new one. So you’ll get to take advantage of today’s higher yields and lower prices when your next bond matures.

The benefit of setting up a bond ladder is that “you’re taking the guesswork out of investing,” Martin said. “It eliminates the need to time the market.”

4. You’re in a diversified bond fund

How today’s high yields affect you depends on the types of bonds your fund invests in.

“A fund that has longer-dated bonds will experience a bigger price decline,” Pappalardo said. “The length of time to maturity is what dictates how much the price moves.”

Prices on shorter-term bonds are less volatile in the face of changing yields, he explained.

But if you’re invested for the long term, fund managers will have to rebalance the portfolio as bonds come due so may be able to invest in lower-priced, higher-yield paper.

5. You’re invested in stocks

Even if you don’t have much bond exposure, there could come a point where stocks take a hit.

“Usually, higher yields are not great for stocks, but lately it hasn’t mattered much. But historically higher rates tend to have a negative impact on stocks. Be cognizant of that,” Martin said.

Even if they do, if you’re investing in certain stocks or stock funds for the long run, and you’re dollar-cost-averaging (i.e., you invest a fixed amount every month), you can benefit when stocks take a hit because you’re buying shares at a cheaper price.

6. You’re shopping for a loan to buy a home or car

Okay, so, the ‘mixed bag’ story ends here.

Neither Martin nor Pappalardo think bond yields will come down from where they are in the near term.

That’s not great news if you’re in the market for a mortgage or auto loan, which are affected by bond yield movements, especially on the 10-year Treasury, among other things.

“The outlook is not great for mortgage rates and long-term borrowing costs. I expect yields to stay elevated,” Martin said. And he’s not seeing much relief ahead on auto loan rates, either.

And should the Federal Reserve raise its overnight lending rate to banks this year? Pappalardo said he would expect mortgage rates to rise even further.

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