Rising Rates: Lessons from 2022

Growing concerns surrounding the fiscal state of the United States and ongoing Middle East tensions have pushed rates higher across the curve since the beginning of the year. As broader fixed income performance turns negative on a year-to-date basis (depending on overall duration and security selection), historical perspective may be useful.

Using data from the Federal Reserve Bank of St. Louis (FRED), we can examine the 10-year Treasury yield going back to 1962 to put today’s market environment in historical context. As shown in Exhibit 1, the 10-year Treasury yield has averaged approximately 5.80% since 1962, the earliest available data. Despite increasing 57 basis points since the beginning of 2026 to 4.75%, the current yield remains below its long-term average.¹

The shorter end of the curve tells a similar story. The 2-year Treasury yield has averaged 4.95% since 1976 and currently stands at 4.34%, after increasing approximately 87 basis points in 2026 (Exhibit 2).¹

Long-term averages, however, provide context rather than a roadmap. Every market environment presents distinct economic and policy challenges, and historical comparisons alone cannot tell us where rates go from here. Rising rates create near-term price pressure for fixed income securities with duration, a lesson investors experienced acutely during the historically difficult market of 2022. The important distinction today is the starting point: higher yields provide substantially more income to help offset potential price pressure.

Exhibit 1: 10-Year Treasury Since 1962

Source: Federal Reserve Bank of St. Louis; data as of August 31, 2026.

Exhibit 2: Two-Year Treasury Since 1962

Source: Federal Reserve Bank of St. Louis; data as of August 31, 2026.

A Look Back at 2022

Calendar year 2022 will forever be etched into the memories of fixed income investors, as one of the Fed’s most aggressive rate hiking cycles in history contributed to record-setting declines across bond markets. From March 2022 through July 2023, the Fed increased the federal funds target range from 0.25% to 5.25%, creating significant headwinds for fixed income securities.²

Exhibit 3: 2022—An Aggressive Fed Hiking Cycle

Source: Bloomberg; data as of August 31, 2026.

Over those 18 months, the Bloomberg US Aggregate Bond Index declined 8.27% on a cumulative basis, or an annualized loss of 5.90%. Additionally, the index delivered its worst calendar year performance on record in 2022, declining 13.01%.²

Breaking down the index’s components of return helps illustrate the impact of the low-rate environment leading into the Fed’s hiking cycle. The yield to worst for the index at the beginning of 2022 was 1.75%, well below its 6.17% average since the index’s inception in 1976. The result is that the yield associated with the fixed income portfolio was not enough to offset the impact from the downward pressures on pricing as rates climbed (Exhibit 4).²

By the end of 2022, however, the index's yield to worst had risen to 4.68%. That higher level of income created a substantially different starting point and helped set the stage for the index's 5.53% return in 2023.²

Exhibit 4: Bloomberg US Aggregate Bond Index Monthly Returns During 2022
Price Return Highlighted

Source: Bloomberg; data as of August 31, 2026.

Why Is This Time Different?

The Federal Reserve has been on hold since December 2025, when the Federal Open Market Committee ended its an easing cycle that began in July 2024 and lowered the federal funds target range from 5.25%-5.50% to its current level of 3.50%-3.75%.²

The environment facing bond investors today differs from 2022 in two important respects.

First, investors entered the current period with considerably more yield. One year ago, the Bloomberg US Aggregate Bond Index had a yield to worst of 4.44%, providing a higher starting income has helped offset some of the price pressure created by rising interest rates this year.²

Second, rates have risen at a substantially slower pace than they did during the 2022 tightening cycle (Exhibit 5). The combination of higher starting yields and a more gradual increase in rates has helped make the impact on total returns considerably less severe.

Exhibit 5: Increase in Yield for Two-Year Treasury
Cumulative, August 31 2025 to August 31, 2026, in Basis Points

Source: Bloomberg; data as of August 31, 2026.

Monthly returns over the past year illustrate this dynamic. Higher yields have provided investors with more income to help offset the negative price impact of rising rates. That income cushion does not eliminate interest-rate risk, but it changes the total-return equation meaningfully.

Exhibit 6: Bloomberg US Aggregate Bond Index Monthly Returns from August 2025 to August 2026
Price Return Highlighted

Source: Bloomberg; data as of August 31, 2026.

What Higher Starting Yields Mean for Investors

With the Bloomberg US Aggregate Bond Index down 0.31% year to date, investors are once again seeing negative returns across portions of their fixed income portfolios. Understandably, that may revive memories of 2022. However, the differences between the two environments are significant.²

Higher starting yields can provide a meaningful cushion against the price impact of rising rates; however, they cannot fully eliminate the impact and portfolios with duration will generally experience price pressure when rates rise. Today, the amount of income available to offset those declines is substantially greater than it was entering 2022. The slower pace of this year's rate increase provides another important distinction between the two periods.

Focus on What You Can Control

Uncertainty surrounding the path of interest rates reinforces why Diamond Hill’s emphasis on bottom-up security selection rather than relying on interest-rate forecasts or sector rotation. In recent years, interest rates have repeatedly defied consensus expectations, often moving significantly over relatively short periods.

Rather than attempting to predict each move in rates, we believe the more durable approach is to construct fixed income portfolios security by security, emphasizing downside protection and attractive risk-adjusted return opportunities. In an environment where the future path of rates remains uncertain, we believe that discipline can help fixed income continue to serve its intended role as a stable component of a diversified portfolio.