For more than 25 years, declining interest rates have driven prices in the bond markets higher, leading to strong returns for investors. But with interest rates today near their all-time lows, investors can't count on further declines to drive future returns.

What happens when interest rates rise?

Bond prices and interest rates generally move in opposite directions – when rates rise, the value of existing bonds declines. The degree of a bond's sensitivity to those interest-rate changes is measured by duration. Expected volatility in rates poses trouble for duration-orientated bond indexes. See how some of Putnam strategies have reduced this risk.

Because today's low rates offer so little income to offset any price declines, even a small increase in rates could lead to significant losses for certain types of fixed-income securities.

Effective federal funds rate, 10-year Treasury yield

What happens when interest rates rise? Show rising rates

Sources: U.S. Department of the Treasury, Federal Reserve, as of 12/31/13.

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