Fixed Income, (Eventually) Rising Rates and the (Non) Universal Law of “Bond Gravity”

July 25, 2014 | Kweku Obed, CFA, CAIA, Managing Director

While we cannot predict exactly when and by how much rates will rise, the Federal Reserve (“Fed”) has recently signaled that we could see a modest increase in the fed funds rate by mid-2015. Given the increased possibility of rates rising over the next few years, investors should not retreat in fear from bonds en masse or look to underweight their fixed income allocations to anemic levels. Instead, they should continue to view fixed income as strategically important: after all, fixed income is a broad asset class with a diverse opportunity set. And, while we will summarize our views on some different sub-asset classes in this paper (including floating rate bonds, non-U.S. debt and convertibles), for additional reading on non-core fixed income sub-asset classes, please refer to our previously released papers on global fixed income, emerging markets debt, high yield and senior secured loans.

In respecting the broadness of our client-base, we seek to avoid a one-size fits all narrative on how they could look to manage their bond allocations: some clients will be limited in their ability to access certain sub-asset classes while others will have ample room and resources to maneuver across the choice spectrum. Consequently, there are  a number of prudent approaches and strategies for these different types of investors to explore as a means of hedging their interest rate risk. The key is establishing which portfolio framework or sub-asset class exposure is the best fit for their programs and in line with their circumstances, risk tolerances, and investment goals.

Download PDF >

Kweku Obed, CFA, CAIA
Managing Director

Get to Know Kweku

Related Content

Scatter chart showing correlation of 10-year Treasury Yield and Correlation of Treasury Yield vs. S&P 500 Return. Chart subtitle: Rising rates have a bigger impact on equities when Treasury yields are much higher than they are today. Chart description: Y-axis shows Rolling 1-Year Correlation: Monthly Change in Treasury Yield vs. Monthly S&P 500 Return, ranging from -1 to +1. X-axis shows 10-Year Treasury Yield from 0-18%. Two series are scattered: Before the Global Financial Crisis in brown and After the Global Financial Crisis in orange. There is some slight overlap of the two around the 3-4% Treasury Yield mark, but otherwise the majority of the Pre-GFC series is to the right of the 4% yield mark and ranges across the x-axis for the full -1 to +1 correlation. The Post-GFC series is primarily above the x-axis, though there are some below, and in the first 4% of yield. March 31, 2021 is highlighted at a correlation of 0.299 and the Treasury yield at 1.74%. Chart source: Source: Bloomberg as of March 31, 2021. Pre GFC: December 1970 – August 2007. Post GFC: September 2007 (FOMC began reducing the federal funds rate) – March 2021.

05.04.2021

When Do Rising Rates Matter the Most?

The first quarter of 2021 saw the 10-year Treasury yield nearly double, which had a profoundly negative impact on growth-oriented…

04.26.2021

One Year Later, What’s Next?

Welcome to our inaugural quarterly client newsletter! As a way of introduction, I am Greg Leonberger, Director of Research here…

04.08.2021

Q1 2021 Market Insights Video

This video features an in-depth analysis of the first quarter’s performance by Marquette’s research analysts and directors, reviewing general themes…

Line chart showing NPI All Property Cap Rates and 10 Year U.S. Treasury Yield. Chart subtitle: NPI All Property Cap Rates have remained flat through the current cycle. Chart description: Y-axis shows percentages frfom 0 to 16%. X-axis shows years from 1981 to present. Recession periods are shaded and labeled marking the beginning of real estate cycles: 1991-1992 for Severe RE Oversupply, 2008-2009 for Global Financial Crisis, and 2020-present for Covid. Line for NPI All Property Cap Rate is blue and rises within the previous two recessions but shows no change for the present recession. 10-year yield line shows changes during each recession. Chart source: NCREIF, FRED (Federal Reserve Economic Data); Cap Rates are of the NCREIF NPI U.S. All Property Index.

04.07.2021

Where’s the Blowout?

A typical real estate cycle has four phases: recovery, expansion, hypersupply, and recession. Typically, the recession phase is marked by…

03.31.2021

Signs of a Market Bottom: One Year Later

This month marked the somber one-year anniversary of the World Health Organization declaring COVID-19 a global pandemic. In addition to…

03.30.2021

Retirement Basics Video Series

This video series is intended for plan sponsors and fiduciaries and covers a variety of topics related to creating and…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >