We believe this is no ordinary rate cycle – and that the Fed is simply “normalizing” rates from their low levels since the financial crisis. The Fed has also signaled that rate increases will be gradual, which should keep interest rates below historic averages for some time. As a result, we expect rates to rise slowly, remaining below historical averages for some time.
Moreover, we believe that rising rates will be along the strengthening, growing economy – and for well-prepared investors, rising rates can signal opportunity.
A thoughtfully allocated, diversified portfolio can help reduce the impact of rising rates as well as capture growth potential.
1st: Seek a better balance of risk and return
Seek a better balance of risk and return by focusing on credit exposure while reducing interest rate exposure. Corporate bonds typically provide additional yield over Treasuries. Shortening the duration of your bond portfolio can help to reduce your interest rate risk. Combining these actions can be an effective way to navigate a rising rate environment.
Barclays U.S. 1-3 Year Credit Bond Index performance (June 2004 – June 2006)
Source: Barclays as of 8/12/15. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
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