I posted a comment on ETF.com, last week, on the article, How I Learned to Love Rising Interest Rates. Although the author’s premise was sound, his proofs were not. Here is my comment:
Although rising interest rates eventually translate into rising returns, you cannot look at the rising interest rate time periods since the 1990s only. I started in the fixed income markets in 1981 at the cyclical peak of interest rates and portfolios were significantly under water. Why? Because those interest rate increases took place for a long period of time. You see a hint of what could happen by looking at the interest rates and bond futures returns chart (posted with the original article).
During the 2004 to 2007 increase in interest rates, the two year forward total returns started rising, but begin falling as the period of interest rate increases continue on. Eventually the total returns rose again because they begin to incorporate periods of falling interest rates. If we have a 5 to 8 year period of rising interest rates, BND and other bond funds would suffer significant pain.
Note: I have included links to our Global Fixed Income and Post-MPT Moderate Allocations in this last sentence. Contact me if you have any questions: [email protected].
Charles H. Self III, MBA, CFA
iSectors – Chief Operating Officer, Chief Compliance Officer, Chief Investment Officer