Upward shift in the yield curve is likely to result in lower return across all maturities?!

CFA Level II
#1

“Upward shift in the yield curve is likely to result in lower return across all maturities”

Hi,

could someone exlain why? As I understand, if shift is upward = higher rates = higher returs?

#2

No, when the yield curve rises that means interest rates go up. If interest rates goes up, then bond prices goes down. Interest rates and bond prices have inverse relationships.

Just think of it as a series of cash flows. If you discount at a LOWER rate, that means the present value of cash flows is HIGHER. If you discount at a HIGHER rate, the present value of cash flows is LOWER.

So basically, yield curve shifts up = higher rates = LOWER returns

#3

Well, lower returns until they’re restored by higher reinvestment income (which occurs after a holding period equal to the Macaulay duration).