- Rising interest rates can negatively impact bond prices in the short-term but a focus on total return, which includes interest income, provides a more accurate picture of bond performance over time.
- An analysis of periods from 1994-2006 when the Federal Reserve raised rates found that while bond prices fell in the majority of months, interest income was positive every month and total returns were positive in 64% of months.
- Diversifying across different types of bonds can help mitigate the effects of rising rates as different bond segments perform variably depending on economic conditions. Professional bond managers employ strategies to offset negative impacts and maximize total returns.
Following an impressive bounce back from February lows, the durability of the current bull market remains suspect. The benefits of the recent rally appear limited to the large cap, defensive sectors of the market. In prior market cycles, this has portended that the latter stages of a bull market are fast approaching and as such, caution is warranted.
Following an impressive bounce back from February lows, the durability of the current bull market remains suspect. The benefits of the recent rally appear limited to the large cap, defensive sectors of the market. In prior market cycles, this has portended that the latter stages of a bull market are fast approaching and as such, caution is warranted.
A review of Q4 2015 corporate earnings reveals a significant slowdown in revenue and earnings growth. While these developments have been affected by the sharp decline in commodity prices,they may reveal early signs of recessionary conditions.
Monthly Market Perspective - June 2016David Berger
The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.
What Impact Would Tighter Monetary Policy Have on Your Investments?InvestingTips
http://profitableinvestingtips.com/investing-tips/what-impact-would-tighter-monetary-policy-have-on-your-investments
What Impact Would Tighter Monetary Policy Have on Your Investments?
A new president is about to take office. Successful investors will be the ones who anticipate how the next administration and congress will affect the economy and how the various factors at play will affect investments. In the case of Trump and a Republican controlled congress we expect tax cuts, an attempt to bring corporate cash back from overseas and increased spending on U.S. infrastructure. If these plans come to fruition there will be at least short and medium term stimulus to the economy. A predictable result will also be increased interest rates, namely a tighter monetary policy. The value of the dollar will rise versus other currencies. Our concern today is what impact would tighter monetary policy have on your investments? Bloomberg writes about the outlook on the Fed, Trump and the dollar.
PKO Bank Polski, which topped Bloomberg’s overall accuracy rankings for the final quarter of 2016, sees the dollar’s rise pushing the euro to 95 U.S. cents or even lower by the end of June, a level not seen in 15 years. That’s the lowest call for the pair among 53 forecasters, according to data compiled by Bloomberg.
The forecast is based on the prospects of a tighter monetary policy from the Federal Reserve, coupled with markets expecting President-elect Donald Trump’s fiscal measures to “translate into higher growth and inflation,” said Jaroslaw Kosaty, the chief FX strategist at the bank, Poland’s biggest.
Will the impact of tighter monetary policy be solely because of a stronger dollar? How will inflation be affected if the Fed does not raise rates rapidly enough?
The allocator shows in detail our view on the financial markets and give insight on our asset, sector and geographical allocation. It can go from 0 - 100% in equity and is actively rebalanced on a monthly basis.
Dimensional Fund Advisors' powerful slides on the small cap and value effect detail how small stocks and value stocks enhance portfolio returns and explain portfolio performance.
Global Value Equity Portfolio (March 2011)Trading Floor
This month we have adjusted our Global Value Equity Portfolio to include the reinvestment of gross dividends and introduced dynamic weights for the constituents. This reduces transaction costs, enhances excess return and makes the portfolio easier to replicate for investors.
Below please find a link to our monthly market perspective piece for December. This month we explore a variety of factors potentially driving markets and evaluate the risks and rewards lying beneath the surface.
Below please find a link to our monthly market perspective piece for May. This month we explore the reality behind market anomalies such as “sell in May and go away.”
This weeks paper addresses steps to overcome the retirement income challenge.
For retirees, investing in fixed income simply may not fulfill income or risk management needs, while investing heavily in equities may expose these investors to untimely amounts of risk. As Americans face this retirement income challenge, it is no wonder that portfolio longevity is now of greater concern than public speaking.
A review of Q4 2015 corporate earnings reveals a significant slowdown in revenue and earnings growth. While these developments have been affected by the sharp decline in commodity prices,they may reveal early signs of recessionary conditions.
Monthly Market Perspective - June 2016David Berger
The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.
What Impact Would Tighter Monetary Policy Have on Your Investments?InvestingTips
http://profitableinvestingtips.com/investing-tips/what-impact-would-tighter-monetary-policy-have-on-your-investments
What Impact Would Tighter Monetary Policy Have on Your Investments?
A new president is about to take office. Successful investors will be the ones who anticipate how the next administration and congress will affect the economy and how the various factors at play will affect investments. In the case of Trump and a Republican controlled congress we expect tax cuts, an attempt to bring corporate cash back from overseas and increased spending on U.S. infrastructure. If these plans come to fruition there will be at least short and medium term stimulus to the economy. A predictable result will also be increased interest rates, namely a tighter monetary policy. The value of the dollar will rise versus other currencies. Our concern today is what impact would tighter monetary policy have on your investments? Bloomberg writes about the outlook on the Fed, Trump and the dollar.
PKO Bank Polski, which topped Bloomberg’s overall accuracy rankings for the final quarter of 2016, sees the dollar’s rise pushing the euro to 95 U.S. cents or even lower by the end of June, a level not seen in 15 years. That’s the lowest call for the pair among 53 forecasters, according to data compiled by Bloomberg.
The forecast is based on the prospects of a tighter monetary policy from the Federal Reserve, coupled with markets expecting President-elect Donald Trump’s fiscal measures to “translate into higher growth and inflation,” said Jaroslaw Kosaty, the chief FX strategist at the bank, Poland’s biggest.
Will the impact of tighter monetary policy be solely because of a stronger dollar? How will inflation be affected if the Fed does not raise rates rapidly enough?
The allocator shows in detail our view on the financial markets and give insight on our asset, sector and geographical allocation. It can go from 0 - 100% in equity and is actively rebalanced on a monthly basis.
Dimensional Fund Advisors' powerful slides on the small cap and value effect detail how small stocks and value stocks enhance portfolio returns and explain portfolio performance.
Global Value Equity Portfolio (March 2011)Trading Floor
This month we have adjusted our Global Value Equity Portfolio to include the reinvestment of gross dividends and introduced dynamic weights for the constituents. This reduces transaction costs, enhances excess return and makes the portfolio easier to replicate for investors.
Below please find a link to our monthly market perspective piece for December. This month we explore a variety of factors potentially driving markets and evaluate the risks and rewards lying beneath the surface.
Below please find a link to our monthly market perspective piece for May. This month we explore the reality behind market anomalies such as “sell in May and go away.”
This weeks paper addresses steps to overcome the retirement income challenge.
For retirees, investing in fixed income simply may not fulfill income or risk management needs, while investing heavily in equities may expose these investors to untimely amounts of risk. As Americans face this retirement income challenge, it is no wonder that portfolio longevity is now of greater concern than public speaking.
Pacific Asset Management is sub-advisor to the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (FLRT)*
2014 has seen the consensus of higher Treasury yields and economic activity fail to materialize. Lower rates and risk premiums have led to strong returns year-to-date. In this commentary, Portfolio Managers David Weismiller, Michael Marzouk, and Bob Boyd discuss the current market environment, outlook, and portfolio positioning.
*Effective but not available for sale at this time. Go to www.advisorshares.com for more information.
asset liability mgt in commercial banks.pptxJohn278053
sset and liability management (ALM) is a practice used by financial institutions to mitigate financial risks resulting from a mismatch of assets and liabilities. ALM strategies employ a combination of risk management and financial planning and are often used by organizations to manage long-term risks that can arise due to changing circumstances.
Similar to Investing in a Rising Rate Environment - Dec. 2011 (20)
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Scope Of Macroeconomics introduction and basic theories
Investing in a Rising Rate Environment - Dec. 2011
1. Investing in a Rising Rate Environment
How Rising Interest Rates Affect Bond Portfolios
By Baird’s Private Wealth Management Research
Summary
With historically low interest rates and the unprecedented monetary
and fiscal stimulus measures taken to combat the market downturn of
2008–2009, many believe that the Fed has no choice but to begin raising
interest rates in the near future. That is a normal course of action and
signals that the Fed believes the economy is on sounder footing. Yet, the
prospect of rising interest rates provides much consternation for bond
investors, who may be disserved by such action. In this paper, we seek
to analyze recent periods of rising interest rates, evaluate how bonds
performed and dispel myths that bonds make for a poor investment in
these periods.
Understanding Bond Performance
Many factors may influence the performance of a bond portfolio, but
changes in interest rates and corresponding bond yields remain the principal
drivers. All too often investors are overly concerned that when interest
rates rise, the prices of their bonds will fall. In fact, this is a mathematical
truth – the directional changes of interest rates and bond prices are inversely
related. Despite the intuitive nature of a bond (collect periodic interest
payments and reclaim par value at maturity), these instruments can be quite
complex. By focusing solely on short-term price reductions, investors can
miss the opportunity to reinvest proceeds in bonds that offer higher yields.
Understanding the concept of total return is critical when investing in bonds:
total return measures both price movements and income received. This paper will
highlight why a total return perspective is needed, particularly in periods of
rising interest rates.
2. - 2 -
Identifying Rising
Rate Environments
The Federal Funds Rate, a target
set by the Federal Reserve (Fed),
is a reliable proxy for interest rate
movements over time. This is the rate
at which banks can lend money to
one another, essentially dictating how
“expensive” money is. Within the last
20 years, there have been three
distinct periods when the Fed went on
a campaign of raising the Fed Funds
Rate target (areas shaded in Graph 1).
The duration and magnitude vary
based on economic conditions. For
example, the 1994–1995 increases
lasted 14 months with a 3.0% rise in
rates, while the 2004–2006 campaign
lasted 25 months with a rate increase
of 4.25%.
Adjusting this rate is among the most
effective tools the Fed has to govern
the economy. Nevertheless, this is a
tool that affects both stock and bond
investments. It is through analysis of
these three time periods (a total of 51
months) that we can begin to gain a
historical perspective of how bonds
truly react to rising interest rates.
Focus on Total Return
The relationship between positive
income (or yield) effects and negative
price effects ultimately determines
how bonds perform in rising rate
environments. Baird analyzed an
index representing a broad mix of
government and corporate bonds
(the Barclays Capital Intermediate
Government/Credit Index) to
determine how price, yield and total
returns changed during these three
periods (Table 1). As expected, price
return was negative in the majority
of the 51 months – 68% to be exact.
Conversely, income return was
positive in each month. In isolation,
both price return and income return
provide an incomplete picture of how
an investor’s portfolio may have
performed – one measure is favorable,
the other is not. Total return, the
TABLE 1:
Decomposing Total Return in Rising Rate Environments
% of MonthsWith
Positive Returns
% of MonthsWith
Negative Returns
Average Monthly
Return
Price Return 32% 68% -0.3%
Income Return 100% 0% 0.5%
Total Return 64% 36% 0.2%
Source: Barclays Capital; Baird Analysis
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Dec-05
Dec-07
Dec-09
Dec-89
Dec-03
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01GRAPH 1:
Federal Funds Rate (1990–2010)
Source: Federal Reserve Board; Baird Analysis
3. - 3 -
combination of price and income
returns, is a more accurate measure of
whether bond investments rose or fell.
Our analysis shows that total return was
positive in 64% of the observations, to
the tune of a 0.2% average monthly
return. To be sure, these are relatively
muted returns, but not nearly as dire
as what would be expected based upon
a singular focus on price return.
To visually illustrate the performance of
bonds in a rising interest rate environment,
Graph 2 shows the cumulative
performance of the index over the three
rising interest rate periods. As you can
see, price return was negative, as
expected, but income performance
helped drive total returns higher during
each of the three periods. The duration
of the rising interest rate period should
also be noted. Depending on the
environment, the Fed may act swiftly or
may be more methodical in its actions.
For example, the most recent rising
interest rate cycle (2003–2006) lasted
approximately 25 months, delivering
a total return of 4.9% for the index
over that time period. In contrast, the
1994–1995 cycle lasted only 14 months
and delivered a total return for the index
of 1.8%. The approach that the Fed uses
has implications for bond investors,
particularly when determining whether
to have a preference for bonds or cash
during the cycle. The more prolonged
and methodical the Fed’s actions are,
the more compelling bonds are relative
to cash.
Diversification Works
The investable bond universe is very
expansive, with more than one thousand
issuers and tens of thousands of bonds
available. Major issuers of bonds include
governments, government agencies and
corporations. Each bond is subject to
different risks and rewards, and therefore
performs differently in varying market
environments. Diversifying your portfolio
by bond type can often help limit the
GRAPH 2:
Price Return (PR), Income Return (IR) and Total Return (TR) in Rising Rate Environments
Source: Barclays Capital; Baird Analysis
IR:
+7.9%
TR:
+1.8%
PR:
-5.9%
IR:
+6.7%
TR:
+2.5%
PR:
-3.9%
IR:
+9.3%
TR:
+4.9%
PR:
-4.7%
1/1/94 – 2/28/95
Duration: 14 months
6/1/99 – 5/31/00
Duration: 12 months
6/1/04 – 6/30/06
Duration: 25 months
15%
10%
5%
0%
-5%
-10%
15%
10%
5%
0%
-5%
-10%
15%
10%
5%
0%
-5%
-10%
CumulativeReturn
1/1/942/1/943/1/944/1/945/1/946/1/947/1/948/1/949/1/9410/1/9411/1/9412/1/941/1/952/1/95
5/1/996/1/997/1/998/1/999/1/9910/1/9911/1/9912/1/991/1/002/1/003/1/004/1/005/1/00
5/1/047/1/049/1/0411/1/041/1/053/1/055/1/057/1/059/1/0511/1/051/1/063/1/065/1/06
4. - 4 -
impacts of rising interest rates. Table 2
shows the performance of various types
of bonds during periods of rising interest
rates. For example, corporate bonds
outperformed Treasury bonds in two
periods, but lagged in one. It is difficult
to generalize what segment of the bond
market performs best when rates are
increasing; therefore, it is important to
have exposure to many different bond
types. Additionally, owning bonds with
different maturity ranges provides a level
of diversification. Generally, shorter/
intermediate maturity bonds offer
better principal protection than longer
maturity bonds.
While focusing on how different bond
types perform during these periods is a
prudent exercise, it is also important to
consider how bond types perform over
time through rising and falling interest
rate cycles. Strategic portfolio allocations
to bonds should be based on longer-term
objectives and market expectations.
Graph 3 shows the 10-year annualized
returns of various bond types. Investors
that had broader exposure to different
bond types generally would have
outperformed cash by a wide margin over
the last 10 years. It is extremely hard to
predict when to tactically move from
bonds to cash; therefore, a longer-term
strategic allocation to bonds is typically
the best approach.
Professional Bond Management
Professional bond investors, either
managing a mutual fund or separate
account, often employ a total return
philosophy using a variety of methods.
They use their experience to evaluate the
current marketplace and incorporate
future expectations before constructing
the most suitable portfolio. The need for
active management of bond portfolios
increases when the consequences of
inaction rise. It is important to note that
each of the Fed’s monetary tightening
campaigns was accompanied by a
different economic backdrop.
TABLE 2:
Performance by Bond Type During Rising Rate Environments
CumulativeTotal
Return
(1/1/94–2/28/95)
CumulativeTotal
Return
(6/1/99–5/31/00)
CumulativeTotal
Return
(6/1/04–6/30/06)
ByBondType
Broad U.S.Taxable Bonds
Treasury Bonds
Agency Bonds
Corporate Bonds
1.4%
0.5%
0.8%
0.9%
2.1%
3.4%
1.6%
0.0%
6.5%
5.7%
6.2%
6.4%
Int’l Bond Market 10.5% -6.2% 9.2%
High-Yield Bonds 3.8% -3.2% 17.9%
U.S. Municipal Bonds 1.7% 0.7% 5.2%
Cash 5.2% 5.2% 6.2%
ByMaturity
Short Govt/Corp Bonds 3.3% 4.0% 4.2%
Intermed Govt/Corp Bonds 1.8% 2.5% 4.9%
Long Govt/Corp Bonds -1.9% 0.7% 10.2%
Source: Barclays Capital; Baird Analysis. See appendix for benchmark definitions.
2.3%
4.8%
5.5%
8.9%
6.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Cash Municipal
Bonds
Govt/Corp
Bonds
High-Yield
Bonds
Global
Bonds
Source: Barclays Capital. See appendix for benchmark definitions.
GRAPH 3:
Ten-Year Asset Class Returns (as of 12/31/10)
5. - 5 -
What worked in one period is not
guaranteed to work in the next.
Outsourcing the management of your
bond portfolio to experienced bond
investors during these uncertain times
is a suitable option to consider.
There are many tools that portfolio
managers have at their disposal. Table 3
lists a few broad strategies that may
prove effective in offsetting some of the
negative effects of rising interest rates
on bond prices.
Managers may attempt to limit the
expected price impact (i.e., shorten the
duration of the portfolio), diversify into
bonds that are less susceptible to rate
changes or find opportunities in
mispriced bonds. Through prudent use
of these strategies, managers may be
able to increase potential performance
relative to benchmarks or attempt to
avoid those areas most impacted by
rate increases.
Where Are We Now?
The Treasury yield curve represents the
additional yield that investors require
when buying longer maturity bonds.
The shape and steepness of the yield
curve is useful when determining
whether to position a portfolio in
short-, intermediate-, or long-term
bonds. Currently the spread, or the
difference in yield, between 2-yr and
10-yr maturities is 2.7 percentage
points, well above the historical average
of 0.9% to 1.2%, indicating a very
steep yield curve. It is expected that if
the U.S. economy strengthens, the Fed
will first reduce some of the monetary
stimulus and then at some point
increase the Federal Funds Rate target,
causing an increase in short-term rates.
All else being equal, this will push the
short end of the yield curve higher,
reducing the steepness of the yield
curve. In similar historical periods,
yields on the intermediate and long end
of the curve rose to some extent, but
did not rise as much as the short end.
It is a common practice for investors to
avoid longer-maturity bonds in rising
rate periods, but given the steepness of
the yield curve, an increase in short-
term rates is likely to have a lower-than-
typical impact on the intermediate and
long end of the curve as spreads begin
to normalize. We stress that while
greater total return opportunities may
be presented further along the yield
curve, these bonds come with additional
risks (namely heightened sensitivity
to rate movements). Therefore, it is
important to speak with your Financial
Advisor about your risk tolerance in
relation to your bond investments.
TABLE 3:
Strategies Employed by Active Bond Managers
Investment
Strategy
Description
Duration
Management
Reducing the duration of a portfolio can lessen its sensitivity to interest rate changes
Yield Curve
Management
Rates may not increase in tandem along the maturity spectrum, making some areas
more attractive than others
Bond
Selection
Finding undervalued bonds can add the potential for price appreciation
Investing
Globally
Not all countries will experience the same degree of monetary tightening as the
United States
Sector
Allocation
Selecting sectors that may have less of a price impact from rising rates
(e.g., some non-government or corporate bond types)