A key guide to positioning your portfolio for rising rates


Nov. 26 2019, Updated 5:38 a.m. ET

Rick covered a bit about what this means for the markets and the economy, but you may still be wondering how to position your portfolio for normalizing rates. In my last weekly commentary, “Rethink ‘Safe Havens’ as Rates Ready to Rise,” I advocate caution toward these two asset classes.

Treasury bonds with two- to five-year maturities. 6— particularly those with two- to five-year maturities — and pushing yields higher. I continue to advocate caution toward these maturities, as I expect they will prove the most vulnerable if the Fed does in fact accelerate the timetable of the first rate hike.

Market Realist – The graph above shows the relationship between yields of short-term bonds and the federal funds rate. They show a positive relationship. This means prices would fall if rates rose since bonds’ yields and prices are inversely related to each other.

To reduce interest rate risk and duration and protect themselves from inflation, investors often gravitate towards short-maturity bonds (SHY).

Article continues below advertisement

But short-maturity bonds are particularly susceptible to changes in interest rates compared to their long-duration counterparts (TLT)(IEF). Due to rising geopolitical tensions and the economic slowdown in Europe (EZU) and Japan (EWJ), investors have been flocking to longer-duration U.S. Treasuries. These Treasuries are often considered safe haven assets. This trend is likely to continue.

So in the bond market spectrum (BND), it would be advisable to avoid short Treasuries in the context of rising rates.

Read on to the next part of this series to see why you need to avoid commodities like gold in a rising rate scenario.


More From Market Realist