As interest rates rise from a three decade low, investors will have to shift strategies and can even capitalize on potential high performers, such as insurance companies and related exchange traded funds.
According to a recent Goldman Sachs research note, insurance companies are among “the clearest winners” in a rising yield environment as they continue to discount liabilities, reports Jenny Cosgrave for CNBC.
For “most of the last decade,” declining yields weighed on insurance companies’ solvency, Christian Mueller-Glissmann, analyst at Goldman Sachs, said.
During the height of the recent Fed “tapering” rhetoric, yields on benchmark 10-year Treasury bonds hit 2.6%. The yields have since dropped to around 2.5%.
Many insurance companies hold onto longer-duration bonds and have been hurt by low interest rates – the companies keep the holdings until maturity. Looking ahead, higher rates will help insurers earn higher returns on their investments. Moreover, insurers have increased their stock market allocations since mid-2012, Goldman said.