What To Do If Rates Rise

A reader asks;

Roger as asset classes go lot of pundits are warning about interest rates rising and warning to get out of bonds, or change duration mix. Have you changed your asset holdings based on these warnings
My feeling is unless economy improves interest rates are unlikely to increase significantly.

This is ground we have covered before but worth going over because of what is likely a long time table. Hopefully it is clear that buying the US ten year treasury yielding first 3%, then 2% and what has been sub 2% for many months now is buying high. People buy high with the hope of prices going higher but buying high is buying high and that takes on risk.

For many years, including the aftermath of the financial crisis buying high has been rewarded with even higher prices. I would have thought there would have been a negative consequence to years of buying high by now but that has not been the case as the Fed continues to distort markets but the intermediate part of the yield curve and farther out the curve is where the most risk is. It may be years before this matters but this is where there is the most risk.

If you can isolate the part of the market that has the most risk then it becomes very easy to figure out for yourself whether you want to take on that risk or not. It is a risk we prefer not to take but you may draw a different conclusion and may get out before the risk matters.

We own a combination of shorted dated corporate bonds with very little interest paid but we avoid interest rate risk. We own short dated foreign sovereign debt which typically yields a little more but does take currency risk. We have a couple of preferred stocks–the yield there is pretty good. And we own a few other things via funds like emerging markets that also have decent yields.

Where the risk is so obvious I would prefer to simply avoid that risk. I agree with the reader that it seems unlikely that rates will go up soon but I would prefer to not buy relatively poor fundamentals at very high prices (long dated treasuries). We have generally avoided treasuries for quite a few years now in line with the thinking outlined above.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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