Strategies to benefit from rising rates

Executive Summary

  • The Federal Reserve’s modest rate hikes of the last two years—widely spaced and oft delayed—are better understood as normalization rather than tightening.We now appear to be in
    a bona fide tightening cycle driven by an improving U.S. economy.

  • Rising-rate periods—particularly early in the cycle—have tended to be favorable for equities.

  • Not all fixed-income asset classes respond the same to a rising-rate environment. Investors can still diversify their portfolios with fixed-income instruments, but it is crucial to
    know which ones.
  • Among true fixed-income instruments, asset classes that tend to do best are: high-yield bonds, investment-grade bonds, emerging-markets debt, floating-rate securities
    and short duration bonds.

  • Just as a diverse portfolio of equity and bonds is recommended for individual investors, it may be best to diminish risk during Fed tightening by spreading exposure over several of these bond categories.

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