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 the Fed rate hiking cycle unfolds and regulatory reform takes effect, investors need to evaluate the implications for their short-term investments.


Today we are well into the current rising rate cycle. The Federal Reserve (Fed) started slowly to unwind its unprecedented post-financial crisis monetary stimulus. It hiked policy rates once in 2015, followed by another single hike in 2016, underdelivering on even its own modest projections. But in 2017 the Fed hiked three times, in line with what it had been signaling to the market, and it raised rates again in March, June and September 2018. Currently the Fed is forecasting a total of four hikes in 2018 and three in 2019; the market is underpricing that scenario. If the Fed decides to move more quickly than it, or the market, has projected, rates could rise further and faster than anticipated.

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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