The Return of Yield: Interest Rates and Your Portfolio
April 16, 2018
By Krista Biernbaum • Securities Analyst
It took a while to get here but we are finally in a rising interest rate environment. Not only have short-term interest rates risen, but longer-term rates have risen as well. A rising rate environment has its pros and cons; you can now get a higher yield on bonds but borrowing costs are higher as well.
Short-term interest rates started rising when the Federal Reserve increased the federal funds rate, the rate banks charge each other for overnight loans. We have seen six 0.25% increases in the federal funds rate thus far from the low point of zero percent in December 2015. Short-term rates will continue to rise as the Fed continues on its path of normalizing monetary policy. However, the Fed has no control on longer-term rates; inflation and the economy are what drive rates on the long end.
Where can you find relative value in fixed income? U.S. interest rates remain attractive compared to other parts of the developed world. Below is a chart from Wall Street Journal’s The Daily Shot that illustrates this. It shows 10-year government bond yields in developed and emerging markets through the first week of April. With the exception of Greece, the U.S. has the highest yield among the major developed markets.
We rebalanced our managed portfolios in the first quarter of the year. One of the changes made was a reduction in foreign bond exposure and we brought those dollars back to U.S. fixed income. The chart above illustrates one of the reasons why. Another concern that motivated the change is our belief that investors may not be properly compensated for the credit risk present in some of the developed countries.
If you are interested in learning more about fixed income markets and changes ahead, contact an advisor today. Our job is to help you get the best combination of high reward and low risk available in a given market environment. What worked yesterday may not be optimal today. Let us work for your best interests.