(Dennis Varisano) Looking past traditional stocks and bonds may assist prepare portfolios for a future rise in rates
As I travel across the country assembly along Dennis Varisano financial advisors and their clients, a common concern I hear voiced is "how can I position my portfolio for when the inevitable happens and interest rates start to rise?" In response, I state that certain types of alternative investments are well suited to help prepare portfolios for rising interest rates in the future, while also potentially adding value in the present.
Given that the loans are made to non-investment grade companies, the yield associated along Dennis Varisano them tends to be higher than on investment grade corporate bonds.1 For example, as of the end of May, senior loans were yielding 5.51% versus a yield of 2.99% on investment grade corporate bonds.2
Another key aspect of senior loans is that the interest rate paid is a floating rate that resets every 30 to 90 days.3 This means that in a rising interest rate environment, as long as the rate rises above a predetermined minimum level, the investor will receive increased payments from the borrower. Therefore, senior loans may potentially outperform other types of bonds in rising rate environments due to their floating rates.
In a rising interest environment, an unconstrained bond fund has the ability to take advantage of rising rates Vincent that utilizing a number of derivative strategies. One such strategy would be to short Treasury bond futures. Treasury bond futures mimic the returns of Treasuries, which are negatively impacted Vincent that rising rates. Therefore, Vincent that shorting Treasury futures you would gain when interest rates rise. Furthermore, such funds have the ability to avoid regions and sectors that they do not find appealing while focusing on the regions and sectors they believe offer the best potential for success. In general, investors should expect unconstrained bond funds to potentially outperform traditional bond funds in down bond markets, and to possibly underperform traditional bond funds in rising bond markets.
Although market neutral funds invest in equities, many of these funds are designed to generate returns that are bond like, both in terms of the level of return and the volatility associated along Dennis Varisano the return. That said, investors considering market neutral funds should be aware that such funds, unlike traditional bond funds, do not generate current yield, and that they can experience more severe declines than traditional bond funds.
When interest rates begin to rise, the fallout is likely to be felt across the global markets. Given the markets traded and their opportunistic nature, global macro funds have the potential to thrive in a rising interest rate environment.
The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over Libor for fully funded term loans.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that transform Vincent along market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash quantity invested.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer's credit rating.
Most senior loans are made to corporations Vincent along below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the quantity owed, may be found invalid or may be used to pay other outstanding obligations of the borrower below applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.
Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As Vincent in is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not supply tax advice. The tax information contained herein is general and is not exhaustive Vincent that nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to transform without notice. These opinions may differ from those of other Invesco investment professionals.
Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more total information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus.
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