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Alternative Market Briefing

Comment: Keeping Your Balance as Rates Rise

Thursday, May 25, 2017

Matthias Knab, Opalesque:

AllianceBernstein writes on Harvest Exchange:

Rising interest rates make bond investors nervous. But purging your portfolio of interest-rate risk can backfire-even in a rising-rate environment. There's a better way to balance risk and return.

We have found that investors can minimize risk and earn relatively high income by pairing rate-sensitive assets such as government bonds with growth-oriented credit assets in a single portfolio and letting their managers adjust the balance as conditions change.

A key benefit of this approach, known as a credit barbell strategy, is that it helps investors avoid leaning too far in either direction-and overexposing themselves to a single risk.

For example, when investors see bond yields rise as sharply as US Treasury yields did between November and March, they often do the following two things:

First, THEY REDUCE DURATION -or interest-rate risk-in their core bond portfolios, which focus on investment-grade debt and include a healthy share of government bonds. Higher rates reduce the market value of these securities.

Second, THEY TAKE MORE CREDIT RISK in their high-income allocation, as high-yield bonds, emerging-market debt and other credit assets tend to outperform when growth and interest rates rise.


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