Preparing for rising interest rates.
Parsing the Data
Morningstar's Markets Research group has assembled a PowerPoint presentation entitled Investing in a Rising-Interest-Rate Environment. (The link goes to Morningstar's Institutional Library, as the presentation isn't yet available to the general public.) The material sets the current bond market in context--what it means to be invested when interest rates are relatively low, and may soon be rising.
1) Interest Rates Remain Unusually Low
You probably knew that. Still, the reminder may be helpful. As the 30-year Treasury yield is now at 3.8%, up sharply from its rate of 2.8% only six months ago, bondholders may be pardoned for thinking that rates have moved up to near-normal levels. That is not so. Since 1926, long Treasury yields have averaged 5.2%.
Similarly, intermediate government bonds are well below the historic mean of 4.5%. Treasury bills, of course, currently pay nothing, which is also atypical.
2) Long Bonds Remain Dangerous
That's also something you probably know--although to judge from the squawking about bond-market losses, some do not. Whereas intermediate-length Treasuries almost never shed 10% in total return during a bond-market sell-off, long Treasuries have done so a dozen times. Three of those 12 declines have occurred over the past five years--highlighting just how easy it is to lose money quickly during a low-rate environment.
3) High-Quality Corporates Look Relatively Cheap