Figure 2: Unhedged vs. Negative Duration Returns as Yields Rise & Fall
Barclays U.S. Aggregate Index Total Returns: Unhedged vs. -5 Duration
While investors should view a negative duration strategy as an implicit bet against U.S. interest rates, they must also understand that total returns from plain-vanilla fixed income are primarily being driven by changes in bond prices, as opposed to income. As a result of potential changes in Fed policy coming this year, we believe that interest rates may be poised to rise in the coming months. In today’s market environment, investors should consider tactical positions in negative duration fixed income strategies to benefit from rising U.S. interest rates.
1Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration.
2Source: Barclays, as of 3/9/15.
3Calculated: 54 basis points x 4.78 years = -2.58% price change.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. The Fund seeks to mitigate interest rate risk by taking short positions in U.S. Treasuries, but there is no guarantee this will be achieved. Derivative investments can be volatile, and these investments may be less liquid than other securities and more sensitive to the effects of varied economic conditions.