Higher Bond Yields and Why Account Location Matters

For most of the last fifteen years, bonds paid relatively little in interest. That's changed considerably, with Treasury yields rising to levels we haven't seen in quite some time.

Higher yields can be welcome news for investors looking to generate income, although rising rates can also affect the value of bonds they already own. They also bring up a planning consideration that doesn't always get much attention: which accounts those bonds are held in.

It's a detail worth understanding, particularly now that bonds are generating more income than they did just a few years ago.

A Look at September's Market Developments

The Federal Reserve raised interest rates in September for the first time since 2023, and longer-term Treasury yields continued climbing through the end of the month. Stocks experienced some fluctuations as yields rose, although major U.S. indexes remained positive for the year.

We also saw hiring slow considerably. Employers added relatively few jobs in September, and revisions to previous months pointed to a softer labor market, even as the unemployment rate remained fairly steady.

For those receiving Social Security, the recently announced cost-of-living adjustment for 2027 is 3.6%, compared with 2.8% this year. That increase will begin appearing in January's benefit payments.

These are all developments we're following, not because any one of them tells us what markets will do next, but because they provide useful context for the financial decisions we're helping clients make.

One consideration that becomes particularly relevant when bond yields rise is how investment income is taxed.

Why It Matters Where You Hold Your Bonds

Bonds and stocks are taxed differently, and those differences become more noticeable when bonds are paying higher interest.

Interest from most taxable bonds is generally taxed as ordinary income each year, often at a higher rate than qualified stock dividends. Gains on stocks held in taxable accounts, meanwhile, generally aren't taxed until the investments are sold.

When bonds were paying very little interest, the taxes on that income were relatively modest. With higher yields, investors may be earning more, but a larger portion of that income may also be going toward taxes. It's a difference that might have been easy to overlook a few years ago, but is worth a closer look today.

This is why we pay attention to something called asset location.

Most people are familiar with asset allocation, which refers to how much of a portfolio is invested in stocks, bonds, and other assets. Asset location is different. It considers which accounts hold those investments.

For example, in a traditional IRA or 401(k), interest isn't taxed as it's earned. In a regular taxable brokerage account, it generally is.

A common starting point is to hold certain bonds in tax-deferred accounts and stocks in taxable accounts, but it's not a rule that works for everyone. Roth accounts, future retirement withdrawals, and tax considerations can all influence the decision, as can your personal goals. How you plan to use your money in retirement, support your family, or eventually pass wealth to the next generation may all affect which approach makes the most sense.

That's why we consider these decisions in the context of your overall financial plan, rather than looking at each account separately. Understanding what you have and what you want to accomplish helps us make more thoughtful decisions about how your investments work together.

How This Fits Into Your Plan

Your financial plan takes into account the investments you own, the accounts they're held in, and how each is taxed. When we're managing your investments, asset location is one of the considerations we take into account when building and maintaining your portfolio.

But asset location works across the household, not just within a single account. To evaluate it properly, we need to understand the accounts you hold elsewhere, too.

If you or your spouse have a 401(k) through an employer, an old IRA, or another investment account that isn't currently reflected in your plan, we'd encourage you to share those details with us. Even when we're not directly managing an account, knowing what's in it helps us see how everything fits together.

Higher yields have made this an especially useful time to revisit those details, but the principle itself isn't new. It's part of making sure investment decisions are considered alongside tax circumstances and longer-term goals.

What We're Watching

As we look toward the remainder of the year, we'll continue to monitor long-term Treasury yields and the Federal Reserve's communications at its upcoming meetings.

We'll also be keeping an eye on Medicare's 2027 premiums, which are expected to be announced later this fall. For retirees, those costs are particularly relevant because Medicare premiums are often deducted directly from Social Security benefits.

Market conditions will continue to change, and not every development calls for a change in strategy. Higher bond yields are a good reminder that investment decisions don't happen in isolation. Taxes, asset location, and long-term goals all play a role in determining what makes sense for a particular household. Keeping up with these changes and evaluating them within the context of clients' financial plans is part of our ongoing work. That helps us determine when something deserves a closer look, when adjustments may be appropriate, and when staying the course remains the better decision.

^{Market data as of September 30, 2026.}

^{This article is intended for general educational purposes and does not constitute individualized investment, tax, or legal advice.}