TAILIEUCHUNG - Investing in a Rising Rate Environment

With historically low interest rates and the unprecedented monetary and fiscal stimulus measures taken to combat the market downturn of 2008–2009, many believe that the Fed has no choice but to begin raising interest rates in the near future. That is a normal course of action and signals that the Fed believes the economy is on sounder footing. Yet, the prospect of rising interest rates provides much consternation for bond investors, who may be disserved by such action. In this paper, we seek to analyze recent periods of rising interest rates, evaluate how bonds performed and dispel myths that bonds make for a poor investment in these periods. Understanding Bond. | Great outcomes. Done well. BAIRD Investing in a Rising Rate Environment How Rising Interest Rates Affect Bond Portfolios By Baird s Private Wealth Management Research Summary With historically low interest rates and the unprecedented monetary and fiscal stimulus measures taken to combat the market downturn of 2008-2009 many believe that the Fed has no choice but to begin raising interest rates in the near future. That is a normal course of action and signals that the Fed believes the economy is on sounder footing. Yet the prospect of rising interest rates provides much consternation for bond investors who may be disserved by such action. In this paper we seek to analyze recent periods of rising interest rates evaluate how bonds performed and dispel myths that bonds make for a poor investment in these periods. Understanding Bond Performance Many factors may influence the performance of a bond portfolio but changes in interest rates and corresponding bond yields remain the principal drivers. All too often investors are overly concerned that when interest rates rise the prices of their bonds will fall. In fact this is a mathematical truth the directional changes of interest rates and bond prices are inversely related. Despite the intuitive nature of a bond collect periodic interest payments and reclaim par value at maturity these instruments can be quite complex. By focusing solely on short-term price reductions investors can miss the opportunity to reinvest proceeds in bonds that offer higher yields. Understanding the concept of total return is critical when investing in bonds total return measures both price movements and income received. This paper will highlight why a total return perspective is needed particularly in periods of rising interest rates. Identifying Rising Rate Environments The Federal Funds Rate a target set by the Federal Reserve Fed is a reliable proxy for interest rate movements over time. This is the rate at which banks can lend money to one .

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