Short-term investment-grade floating-rate notes with coupons that float with short-term interest rates, such as LIBOR
Senior secured loans that feature a low duration profile and floating coupons
Higher-yielding debt such as short duration high yield corporate bonds that offer attractive yields per unit of duration
Sectors and Industries for rising interest rates
Reexamining asset allocation for a potential rising rate period should extend beyond fixed income. Investors may also wish to consider tilting core US equity exposures to sectors and industries that benefit from operations positioned to profit from higher rates and improving economic growth. Consumer Discretionary and Financials are two interest-sensitive and cyclical sectors that we feel may benefit most in a potential rising rate period.
Among industries, investors may consider:
Homebuilders: The US labor market continues to strengthen as the unemployment rate recently dropped to 5.1%,6 led by the consistent improvement in full-time employment.7 The strong employment backdrop has buoyed homebuilder sentiment,8 housing demand9 and household spending.10 Incorporating discretionary housing industries, such as home improvement and furnishing retail, and expanding beyond concentrated positions in new home construction firms is the preferred approach to capturing the full effects of this bourgeoning housing market.
Regional Banks: Rising rates should lead to improved profitability as banks’ net interest margin on loans improve. The financial sector and related sub-industries, banks and regional banks, display the strongest positive relationship to rising interest rates with regional banks exuding the highest of any sector or industry.11 As economic conditions have improved, we’ve already seen an uptick in consumer12 and small business lending.13 Banks are more willing to lend amid improved economic conditions, which should drive profitability. Importantly, given that regional banks tend to be closely connected to consumers, we feel they should stand to benefit the most.
The takeaway for investors
While volatility could remain elevated until there is more clarity on rates, it’s important to remember that investors have successfully weathered rising rate environments in the past by keeping an eye on asset class allocation and regularly rebalancing portfolios.
For more guidance on positioning portfolios for a rising rate climate, Investment Professionals can access the following tools:
The Untold Story of Rising Rates Flipbook: This slideshow captures 20 years of interest rate effects on asset class performance.
Portfolio Solutions for a Rising Rate Environment: Use this 1-page quick reference guide to find out which SPDR® ETFs may help mitigate the impact of a rising rate environment.