The threat of rising short term interest rates in the US suggests that investors in more sensitive high yield fixed income instruments should be worried about the effect on the value of their assets.
Advent Capital Management has, however, published research suggesting that the link between rising interest rates and depressed return on fixed income is not straightforward. Other factors, such as correlation between US government debt and equity markets, could impact the yield investors experience.
Therefore, although the research concludes that investors are right to be concerned about the effects of a return to normal monetary policy in the US, it does not follow that the effects will be felt equally by investors.
For those who are concerned, Advent Capital suggests three ways high yield can still outperform as interest rates rise:
- Populating the portfolio with high conviction alpha ideas that can outperform in any market
- Keeping the portfolio duration below that of the index, which reduces overall volatility and downside risk
- Underweighting BB-rated issues because they are more sensitive to interest rates than lower quality issues with larger credit components
To read the full research click here: High Yield Bonds in a Rising Rate Environment – September 2014