While examining these strategies independently can give some insight into the future drivers of total return, we believe that the real value of these strategies is how they can be incorporated into a broader portfolio of interest rate sensitive assets. As shown above, hedging interest rate risk during periods in which rates actually fall is likely to create a drag on investment returns. This is to be expected; hedging risk incurs a cost. However, with investors relatively complacent about rising rates, we believe that these strategies can offer valuable cover when the Fed starts to shift policy.
Important Risks Related to this Article
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.