Rising Rates: Managing liquidity through periods of rising interest rates - J.P. Morgan Asset Management

Rising Rates: Managing liquidity through periods of rising interest rates

Rising rate environments can challenge even the most sophisticated fixed income investor. As a new Fed rate hiking cycle unfolds and regulatory reform takes effect, investors need to evaluate the implications for their short-term investments.


In brief

The Federal Reserve (Fed) has hiked policy rates for the first time in nearly a decade, ending a zero interest rate policy that has been in place since 2008. The long-awaited move ended an extraordinary chapter in the history of monetary policy. The pace of Fed hikes is expected to be measured and the trajectory shallow. Even as the Fed tightens, however, other global central banks are expected to continue their monetary easing.

When interest rates rise, the market value of previously issued fixed coupon bond holdings will fall as investor demand shifts to new, higher-yielding bonds. But not all securities are created equal. Bonds with shorter maturities, floating interest rates and/or higher yields should experience less dramatic price declines.

During periods of rising interest rates and stable credit conditions, investors can improve the total return of their bond portfolios by shifting into shorter duration and higher-income-generating strategies.

A study of past rising rate cycles and dynamic scenario analysis of potential future rate moves can provide a valuable perspective to an investor managing liquidity through a rising rate environment.

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1 Investment Company Institute website.
2 Markit five-year CDX North America Investment Grade index spread widened eight bps (Source: Bloomberg) and the Barclays U.S. Aggregate option adjusted spread (OAS) widened five bps (Source: Barclays).

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