Bond Prices in a Rising Rate Environment

By: Richard Shaw | Mon, Jul 7, 2014
Print Email

JP Morgan Asset Management put out their Q3 2014 market outlook in which they discuss bond performance in a rising rate market. You should be aware of the key points they make.

In this table, JPM explains how a +/- 1% interest rate change would impact each of several types of bonds:

Prime Impact of a 1% Rise/Fall in Interest Rates

You can see that longer maturities have the greatest price reaction to rate changes; that floating rate loans have the lowest reaction to rate changes; and that the bond market in the aggregate has a roughly +/- 5.6% price sensitivity to a +/- 1% interest rate change. The average duration of that universe of bonds is about 5.6 years.

High yield bonds are bit less sensitive to rate changes than the aggregate bond index, and muni bonds are a bit more sensitive.

In the broadest sense, intermediate-term bonds might have a 1% upward rate change risk over the next year or two, while very short-term bonds might have a 1% to 2% upward rate change risk. Nobody really knows for sure.

This chart of the Treasury yield curve at different times may help with a feel for the potential rate changes.

US Treasury Yield Curve

Bottom line for us is that bonds have much more price risk than in the past few decades, because the long-term path of rates is likely up, as opposed to the long decline in rates from the early 1980s to the current era.

This chart shows you the downward yield path over 30+ years for 3-mo, 2-yr, 10-yr and 30-yr Treasuries.

downward yield path over 30+ years for 3-mo, 2-yr, 10-yr and 30-yr Treasuries

Those days are behind us, and a rise in rates and declines in issued bond prices are eventually in store.

 


 

Richard Shaw

Author: Richard Shaw

Richard Shaw
QVM Group LLC

Richard Shaw

Disclaimer: Opinions expressed in this material and our disclosed positions are as of July 5, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

IMPORTANT NOTE: We are a Registered Investment Advisor. We do not sell investments or control client assets. We are professional advisors compensated on an hourly basis or flat fee basis for portfolio management or for our coaching advice. Clients for personal investment advice receive recommendations and guidance tailored to their specific needs. Newsletters and research publications, are not personal investment advice, are generic in nature and should not be interpreted as specific advice for any specific person or situation. In our research, we utilize information sources that we believe are reliable, but do not warrant the accuracy of those sources or our analysis. Research, data and opinions expressed on this site are for information purposes only, are general in character and are not advice specific to any individual investor.

Copyright 2008-2014 by QVM Group LLC All rights reserved.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/