Yields on core fixed income benchmarks (like portfolios of bonds) are near historical lows. Monetary easing policies by central banks – low interest rates and most recently bond buying programs – are driving this low yield.
Yet, interest rate risk is high. When we tracked changes in the value of bonds in response to a change in interest rates from January 1990 to September 2016 it implied that sensitivity to interest rate changes is currently at an unprecedented high. Any capital lost from interest rate increases would be hard to recoup.
It looks like the Bank of Japan, Bank of England and the European Central Bank (ECB) are likely to continue their loose policy stance, keeping interest rates low. In the United States, however, communication by the Fed shows that an interest rate hike is likely.
So, what happens when interest rates rise?
Without strategic solutions in place, capital will likely be lost. As we point out elsewhere, however, there are some strategies accessible through index-based solutions that may mitigate this interest rate risk.
In the face of a likely rate hike, it’s a good time to consider such strategies.
Investors should be aware that past performance is not an indicator of future results.