sk an Expert is a new monthly feature to the newsletter that invites experts in their field to shed insight and answer questions on topics that may be of interest to our members. We are fortunate to have a large pool of qualified experts from which to choose each month. Each feature will always list additional Chamber experts that provide this service. We posed the following question to Michael Stone our guest blogger for the month of October.
"Where to invest when rates are rising?"
Guest Blogger: Michael Stone
As expected, 2018 has seen the return of the business cycle and the accelerating economic growth that has accompanied it have combined to push market interest rates higher in the first half of the year. Periods of stock market volatility have resulted in temporary flights to quality where investors seek safe-haven assets like U.S. Treasury bonds, pushing their yields lower and highlighting the diversification benefits of high-quality fixed income within portfolios. However, I continue to believe the long-term fundamental drivers, including economic growth, deficit spending, rising inflationary pressures and expectations of future Fed rate hikes, may push bond yields marginally higher as the year progresses. Given this back-and-forth volatility in market interest rates, I encourage suitable investors to employ more active strategies within their fixed income portfolios going forward. Bonds play an important role in a diversified portfolio. A diversified fixed income portfolio might include some of the following types of bonds: U.S. Treasuries, Investment-Grade Corporate Bonds, Municipal Bonds, Mortgage-Backed Securities, High–Yield Bonds, and Global Bonds (Sovereign Debt). They can provide income and liquidity, and may serve to help manage portfolio volatility during periods of stock market turbulence. I continue to position portfolios with below-benchmark (Bloomberg Barclays Aggregate) interest rate risk, preferring to take credit risk in the current environment. Above all, investors should remain focused on their long-term goals rather than attempting to maneuver short-term volatility.
For a more detailed explanation on Managing Interest Rate Risk, please read the attached Bond Market Perspective from LPL Chief Investment Strategist, John Lynch, last year’s Keynote speaker for the UWG Richards School of Business Economic Forecast Breakfast.
Managing Interest Rate Risk