Daily Difference: Rising Rates, What does it mean for your portfolio?

"Know what you own, and know why you own it." - Peter Lynch Higher Interest Rates 6-15-2015

Interest rates have been declining in the U.S. since 1981 when the yield on the U.S. 10-year Treasury peaked at about 16%.  Interest rates have declined since that time to the low interest rate environment we see today, with the 10-Year Treasury now yielding approximately 2.5%, up from under 2% earlier this year.  Many experts have been calling for higher rates over the past few years, and this prediction appears to be imminent.  However, the degree and speed to which rates will move higher remains the greatest unknown.  It is important to remember that even a small rise in interest rates can lead to losses in bond prices, especially those with longer maturities.

Current outlook

We anticipate interest rates to move higher in an erratic fashion, with short term rates rising more than long term rates this year.

We believe that the Federal Reserve will begin raising interest rates later this year or early next year.

We believe more accommodative central bank policy abroad, along with unexceptional growth in the U.S., will combine to result in a slower rise in interest rates than we have seen during previous cycles.

What do we believe at Gill Capital Partners, and how are we positioning your portfolio?  The current environment and our conclusions should not catch anyone by surprise. At Gill Capital Partners, we have been planning for this eventuality for a long time in both our portfolio management and financial plans.  Below is an overview of our current positioning and a summary of how those moves have acted as rates have moved higher over the past few weeks.

Individual Bonds – As quoted above, we are big believers in understanding what we own.  To the degree possible, we will use individual bonds to build out cored fixed income positions within client portfolios.  Gill Capital Partners has a unique institutional fixed income business that allows us to buy individual bonds directly and remove countless layers of costs.  Our fixed income team buys individual high quality and highly liquid bonds that we are comfortable holding to maturity.

Shortened maturities – Over the past couple of years we have been shortening maturities within client portfolios in anticipation of higher rates.  Remember longer dated bonds are more sensitive to interest rate movements.

Strategic Fixed Income Managers – We have added “strategic fixed income” managers to client portfolios in place of a portion of the core fixed income positions.  Strategic fixed income managers have the ability and the flexibility to move across the interest rate and credit spectrum along with taking short, or inverse positions.  This flexibility allows them to generate positive returns within fixed income, even in a rising interest rate environment.  The Investment Committee at Gill Capital Partners has dedicated extensive resources to identifying suitable managers and performing due diligence on them prior to including them in our client portfolios.

How have we done?

We are happy to report that the strategies outlined above, working together in a holistic and thoughtful approach, are doing exactly what we had hoped and expected in this environment.  Your team at Gill Capital Partners has been working hard to be proactive in the positioning of your portfolio with the prospect for higher rates looking ever more likely. Please feel free to call us if you have any questions or concerns as to how rising rates may affect your financial goals.