Rising rate environments can challenge event the most sophisticated fixed income investor. As we consider the current market juncture and assess its potential impact on liquidity management, we make these key observations:
- UK and US interest rates are poised to rise from levels that are near their all-time lows, with the 10-year Gilt yielding 1.81% (as at 29 May 2015). Amid deverging central bank policies, the European Central Bank and Bank of Japan are expected to continue their monetary easing.
- When interest rates rise, the market value of previously issued fixed coupon bong holdings will fall as investor demand shifts to new, higher-yielding bonds. But not all securities are created equal. Bonds with shorter maturities, floating interest rates and/or higher yields should experience less dramatic price declines.
- During peroids of rising interest rates and stable credit conditions, investors can improve the total return of their bond portfolios by shifting into shorter duration and higher-income-generating strategies.
- A study of past rising rate cycles and dynamic scenario analysis of potential future rate moves can provide a valuable perspective to an investor managing liquidity through a rising rate environment.