Performance in a Rising Rate Environment

With all the fluctuations associated with the markets over the past few weeks, we wanted to address this.

This is a rare time where the volatility associated with markets is not dealing with the typical stock market, but instead the interest rate and income/bond market. We saw rates spike from 1.66% on 5/1/13 to 2.16% on 5/30/13. This move of 0.5% in just one month is an extremely rare occurrence and a response to the Fed discussing potential tightening towards the end of the year. We are monitoring investor sentiment associated with the Fed’s recent actions and also gauging the possibility of future shocks. The CIA Investment Committee believes that the recent spike is not going to be the norm, but instead a knee-jerk reaction to the recent commentary.  Our position on interest rates remains the same as in recent months: we expect rates to rise over a long time-horizon as opposed to retreating. This is aligned with the signals given by the Fed that an easy monetary policy will be a slow multi-year unwind. 

The media is referring owning bonds (and thus other income investments) a “bond bubble”. The are calling it a bubble because rates are at historically low levels and only have one direction to truly go from the bottom…..UP!  We agree with this, but if you see from our research regarding “other” asset classes that provide yield, rising interest rates do not always signal negative returns for all dividend-yielding asset classes.  Keep in mind that bonds will likely experience a challenging environment while rates rise over the next decade or more, but this is why we suggest owning multiple asset classes for yield such as MLPs, REITs, preferred stocks, closed end funds, dividend-paying stocks, etc. to balance the effect.

We are confident that our income strategy is poised to perform as expected in these types of rising interest rate environments. Avoiding unexpected shocks in equity or income markets is not what we are trying to accomplish with our client portfolios.  Our goal is to match a client’s current or future income needs with a diversified mix of assets that aim to deliver results (income or growth) over a long-time horizon.  There will always be times when markets jump and jive and this cannot be avoided without exiting the markets with perfect timing or completely altogether.  See attached a recent study we have composed to understand how the non-fixed income asset classes held within our income “bucket” perform during recent periods of rising rates.

Are you interested in knowing more? Take a look at our chart that addresses bond bubbles and rising interest rates.