As you spend time investing, you likely focus on ways to manage risk, searching for ways to improve stability as well as opportunities to generate returns.
Bonds may already form part of your portfolio, or you may be considering them as a way to diversify and balance your position.
Essentially, bonds are loans to governments or companies in exchange for a fixed interest payment, known as a “coupon”, over a specified period of time.
In the UK, government bonds – often referred to as “gilts” – have been generating significant attention recently.
Morningstar reports that, as of early 2025, the yield on 30-year gilts climbed to levels last reached in the late 1990s, while 10-year gilts matched levels last seen during the 2008 financial crisis.
Yet, there has been some volatility in bond markets since then, partly due to rising concerns around a global trade war, FTAdviser claims.
Regardless, you might still be wondering what rising yields could mean for your portfolio – continue reading to find out.
Rising bond yields have been caused by sticky inflation and economic uncertainty
It’s vital to understand why bond yields tend to rise, as they are closely linked to overall economic performance.
Indeed, yields and prices tend to move inversely. For reference:
- Yields are the total return you can expect to receive from a bond
- Price is the current market value of the bond.
So, when interest rates increase, bond yields tend to rise, while bond prices tend to fall.
While inflation has cooled somewhat in 2024, its decline has proven to be slower than many investors initially anticipated.
This has led the Bank of England (BoE) to maintain higher interest rates for longer than markets expected, with the base rate standing at 4.25% as of 28 May 2025.
As inflation continues to remain above the BoE’s 2% target – rising by 3.5% in the 12 months leading to April 2025, the Office for National Statistics reveals – bond prices have remained relatively high, adding pressure to markets.
Rising yields haven’t just been seen in the UK. In the US, government bonds – known as “Treasuries” – have also seen a surge, driven partly by uncertainty over the new President’s economic policy.
Fidelity states that concerns over Trump’s reciprocal tariffs caused the 30-year US Treasury yield to rise from about 4.5% to 5%, before declining after he changed his mind.
3 benefits to holding bonds in your portfolio
If rising bond yields have tempted you to add them to your portfolio, there are several benefits of doing so – read on to discover three.
1. They tend to be seen as lower-risk investments
Perhaps one of the main draws of bonds is their perceived safety compared to other assets such as equities, as their security often lies in the financial stability of the issuer.
For instance, gilts in the UK are widely regarded as reliable, as the government has a proven track record of meeting its debt obligations.
In fact, the Debt Management Office reveals that the UK government has never missed an interest payment on gilts, making them a potentially dependable option if you’re cautious about risk.
2. They allow you to diversify your portfolio
As mentioned, you may simply be seeking additional ways to diversify your wealth and spread risk across your portfolio.
By spreading your investments across various sectors, asset classes, and geographical areas, you could reduce risk and boost your long-term financial stability.
During periods of market downturn, you may find that bonds offer stability, potentially offsetting losses elsewhere.
This could also help you avoid making emotion-led decisions during turbulent times, as having elements of a portfolio that perform well in different situations could act as an “anchor”, allowing you to avoid reacting to short-term market noise.
3. They pay regular interest
Since bonds offer a fixed, predictable interest payment, this could make them an appealing choice if you’re seeking a passive income from your portfolio, especially during retirement.
If you’re more focused on growth, you could reinvest coupons with the aim of boosting your returns over time.
However, it’s vital to remember that investing means balancing risk and reward. Since bonds are considered lower risk, the returns may be lower, too.
3 considerations to keep in mind regarding bonds
While bonds can provide useful benefits, they also have several downsides that are worth keeping in mind. Here are three.
1. They typically offer lower returns than stocks
Due to the reduced risk mentioned above, bonds generally deliver lower returns compared to equities.
While this safety might offer reassurance, it could mean that your overall investment growth may be slower compared to a portfolio weighted more towards stocks.
This is why you may want to consider a “60/40 split”, where you allocate 60% of your invested funds to shares and 40% to bonds.
Historically, this has provided consistent long-term returns, as the chart below shows:
Source: Vanguard
Note: The chart is based on the 10-year rolling returns of the 60/40 strategy dating back to 1997, based on a number of indices.
As you can see, while the strategy has experienced its fair share of good and bad years, the 10-year returns have been far more stable.
With bond yields rising, this strategy might seem even more attractive. Still, it’s vital to tailor your investment strategy to your goals, time frame, and tolerance for risk.
2. Dealing charges could erode returns
You should also be aware of potential unexpected costs when dealing with bonds.
Buying and selling bonds can involve dealing charges or brokerage fees, which may erode your overall returns, especially if you trade frequently or hold smaller positions.
Ensuring that you understand these costs could help to ensure any decisions you make remain cost-effective over time.
We could help you here, ensuring any decisions you make regarding your portfolio remain cost-effective.
3. They are typically long-term investments
While all investing should ideally be seen as a long-term commitment, it’s important to note that bonds tend to be fairly inflexible.
Once you purchase a bond, your money is essentially “locked away” until the maturity date. This could be as short as 30 days, or as long as 30 years, depending on the type of bond you purchase.
Even though you can sell a bond before it matures, doing so might involve accepting a price below what you originally paid, especially if yields have seen significant volatility.
This is why it’s so important to assess whether you can realistically afford to commit to bonds before you purchase them.
However, if you are investing in bonds through a fund or collective investment scheme rather than purchasing them directly, considerations two and three above are not applicable. For the majority of our clients, their bond exposure will be through such funds.
Get in touch
If you’re still unsure whether bonds suit your unique circumstances, then we could help assess the right options for you.
To find out more, please use our search function to find your nearest Verso office, or for Verso Investment Management enquiries, please contact us at info@versoim.com or call 020 7380 3300.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.