How to Weather a Rising Interest Rate Environment

It appears that in a few weeks’ time, the Janet Yellen Fed may finally tighten the reins on the slightly anemic but well-employed U.S. economy. If economic reports stay neutral-to-positive through December, we could see the first Fed funds interest rate hike since the mid-aughts. This shift has been seen before, causing repercussions that reverberated throughout all public markets, but most specifically in the credit markets, as spreads grew wider and yield curves steeper.

With this knowledge in hand, the important question becomes ‘what are the actionable ways to seek effective yield in a rising interest rate environment?’ We found this topic strikingly similar to one we wrote about more than a decade ago in 2004 and were surprised to find that most of our guidance is still as germane at the end of 2015 as it was at the end of 2004. However, the market landscape has changed and will continue changing dramatically over the next twelve months. Among other things, there is the possibility that the Fed may increase rates at a more moderate pace than in the past. Thus, as investment committees meet before the holiday season, it will prove prudent to investigate some looming decisions just across the horizon in 2016.

Conceptually, there are a few broad areas within an investment strategy that are affected by a move in interest rates, from duration risk to how one should position their securities and what they should be. This month’s research clarifies some of those decisions that should be front-of-mind over the next few months.

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Best Regards,

Ben Campbell
President & CEO