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Alternative Market Briefing

Investors should prepare portfolios for eventual rise in interest rates - Credit Suisse

Thursday, May 10, 2012

Bailey McCann, Opalesque New York: Investors may want to start preparing their portfolios for the impact of a rise in interest rates according to a new report from Credit Suisse Asset Management. Although still muted, the strengthening economy has re-ignited inflation concerns and the report authors caution that investors need to start thinking about repositioning their portfolios now to avoid future potential pitfalls.

In this environment, investors can benefit from an allocation beyond core fixed income, especially at the non-investment grade end of the spectrum, according to John Popp, Global Head and Chief Investment Officer of the Credit Investments Group and author of the paper.

"The Fed’s decision as to when to raise rates next is crucial. A move to higher rates may signal a sustained period of US economic improvement, but a sharp increase could derail the recovery," writes Popp. He suggests trading duration risk for credit risk may be prudent for investors.

The report notes that high-yield bonds offer compelling defensive value based on their present average duration and recent call protection dynamics.

"We believe high-yield bonds and senior loans are attractive alternatives for fixed income investors who are seeking to preserve value and drive incremental yield," Popp writes. Adding investment grade debt may also add yield while mitigating risk according to data presented in the paper.

The report, Beyond the Core: Preparing Portfolios fo......................

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