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Financial Industry Insights from Advisors Asset Management
On July 25, 2013
Investing In Bonds When Rates Are Rising
Successful bond investing is rarely easy but certain interest rate environments can make bond investing look particularly difficult. A sharply rising interest rate environment is one of those difficult investment scenarios, one that may cause some investors to shy away from bond investing altogether. We suggest it is important to remember, particularly in these difficult environments, that objectives usually associated with bond investing still have to be met. Whether it’s the need for reliable after-tax income, relative capital preservation, or overall safety, these needs don’t get to take a day off just because market conditions become unfavorable.
How can investors “stay in the bond game” during these difficult rising rate environments? Here are some suggestions:
A sharply rising interest rate environment is not pleasant for bond investors to go through. It can prompt such quick reactions as, “Bonds are getting killed today. Why should I bother?” To that, we feel compelled to ask, “Which bonds are you talking about?” Our question points out the reality of a wide variety of bond sub classes in which to invest as well as countless maturity dates, coupon sizes, bond features, and credit quality levels. The broad statement, “Bonds are getting killed today”, is perhaps as meaningful as saying, “The weather in the United States wasn’t good today”. Of course, it all depends on where you are.
The general judgment of many market observers is that interest rates will rise from current levels over the next few years. Judgments on the direction of interest rates can always be debated but it is unusual for interest rates to move in a straight unstoppable line upward. Markets naturally tend to back and fill, to digest sharp movements, to effectively debate the speed of that rate rise every step of the way. We believe bonds can still play a role in a balanced investment program even in a rising rate environment. Knowing what you own in the bond universe from the perspective of asset class, maturities, coupons, bond features, duration, and credit is an essential tool for bond investors, particularly in these challenging markets. It could make the difference between sticking with an asset class that can still perform important investment tasks and unwisely abandoning it altogether.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Municipal Disclosures webpage. For additional risk information see the Blog and Commentary Disclosures website. For additional commentary or financial resources, please visit www.aamlive.com
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