Strategies for Investing in a Rising Rate Environment
By Heather Rupp, CFA, Director of Communications and Research Analyst for Peritus Asset Management, Sub-Advisor of the AdvisorShares Peritus High Yield ETF (NYSE Arca: HYLD)
Accurately calling interest rate moves has proved to be a difficult, and futile, task for investors over the past few years as we have seen wild moves and really no sustained direction. As we entered 2014, virtually everyone (except ourselves) expected rates to rise as the long awaited “taper” began. Yet, the opposite played out over the year with the 10-year Treasury rate falling from a high of 3.01% in the beginning of January to end 2014 at 2.17%. 2015 saw rates swing from a low of 1.68% early in the year, to a high of 2.5% in June as the expectations became stronger that the Fed would be raising rates. One rate hike happened and we closed out 2015 with rates right around the 2.3% level, only to fall below 1.6% in early 2016. The only aspect of rates that can be accurately predicted is volatility.
As we look forward, we know the Fed wants to raise rates, though the primary impetus to do so seems to be to have room to lower them should they need to later, rather than strong economic growth supporting the need to do so. The data for the “data dependent” Fed doesn’t clearly support a rate increase, and after this month’s Fed meeting, we seem to be getting further and further away from an increase. While we are not convinced that a rapid rise in rates is on the horizon, for the sake of argument, let’s assume that rates do rise materially from here. What does that mean for the high yield market and the various “strategies” out there to deal with rising rates? See our updated piece, “Strategies for Investing in a Rising Rate Environment.”