Prudential PGIM Thematic Pages

Positioning Portfolios for Rising Rates

Rising rates present a significant challenge for investors, especially for those whose portfolios contain exposure to interest-rate-sensitive investments.

The Trend Rates are on the Rise

Rising rates can have a lasting impact on investment portfolios, which makes now a good time to examine portfolio allocations and identify where adjustments might be needed.

Consider strategies designed to help manage duration, generate yield, and diversify exposure.

A Look Back How often do interest rates rise?

Since 2000, there have been six periods where the 10-Year U.S. Treasury yield rose by 75 basis points or more. Select a rate period below to see more details.

Yield (%) 7 6 5 4 3 2 1 0
| Dec 00 Dec 17 |

Source: Bloomberg, Morningstar, and Federal Reserve Economic Data as of 12/31/17.

A Look Back Strong performing asset classes

Fixed Income

Due to their inverse relationship, rising rates typically reduce the price of bond assets. Historically, less interest-rate-sensitive assets with shorter duration or floating rates have provided better total returns in rising rate periods.

Fixed Income Chart 17.7% Short Duration High Yield 11.0% Floating Rate Loan 6.3% Non-traditional Bond 1.6% U.S. Bond
Fixed Income
Equities
Equity Chart 26.6% Small Cap Equity 21.7% Int’l Equity 19.6% Global Equity 17.7% U.S. Equity
Equities
Real Assets
Real Assets Chart 25.4% Natural Resources 22.2% MLPs 18.8% REITs 1.5% Inflation
Real Assets

See performance for additional asset classes

Source: Calculated by PGIM Investments using data presented in Morningstar software products. All rights reserved. Used with permission. As of 12/31/2017. Average returns represent the simple average of returns for the most recent six rising rate periods: 10/1/01–3/31/02, 5/1/03–6/30/06, 12/1/08–12/31/09, 8/1/10–3/31/11, 7/1/12–12/31/13, 7/1/16–1/31/17. Rising rate periods are defined as a period when the 10-year U.S. Treasury yield rose by 75 basis points or more, and ends when the yield declines by 5% of its peak value. Returns for periods longer than one year have been annualized. 75 basis points increase in the 10-Year Treasury represents a substantial increase in interest rates. Past performance is no guarantee of future results.

Portfolio Construction Impact of Rising Rates on Portfolios

Adjust Fixed Income Allocation

On average during the last six rising rate periods, reallocating 5% from a traditional U.S. bond allocation to less interest-rate-sensitive fixed income sectors would have resulted in higher returns at relatively similar levels of risk.

Portfolio C Add short duration high yield bonds (SDHY)

Add short duration high yield bonds (SDHY)

  • 60% U.S. Equity
  • 35% U.S. Bonds
  • 5% SDHY
Portfolio B Add floating rate loans

Add floating rate loans

  • 60% U.S. Equity
  • 35% U.S. Bonds
  • 5% Floating Rate Loans
Portfolio A Add non-traditional bonds

Add non-traditional bonds

  • 60% U.S. Equity
  • 35% U.S. Bonds
  • 5% Non-traditional Bonds
Portfolio 60/40 60/40 Portfolio - Traditional Portfolio

60/40 Portfolio - Traditional Portfolio

  • 60% U.S. Equity
  • 40% U.S. Bonds

Source: Calculated by PGIM Investments using data presented in Morningstar software products. All rights reserved. Used with permission. As of 12/31/2017. Average data represent the simple average of data for the most recent six rising rate periods: 10/1/01–3/31/02, 5/1/03–6/30/06, 12/1/08–12/31/09, 8/1/10–3/31/11, 7/1/12–12/31/13, 7/1/16–1/31/17. Rising rate periods are defined as a period when the 10-year U.S. Treasury yield rose by 75 basis points or more, and ends when the yield declines by 5% of its peak value. Returns for periods less than one year have not been annualized. Graph is hypothetical in nature and used for illustrative purposes only. Past performance is no guarantee of future results. See index definitions

Portfolio Average Return (%) Average Risk (%) Average Sharpe Ratio
60/40 11.19 7.28 1.91
A 11.44 7.33 1.94
B 11.68 7.30 1.98
C 11.98 7.40 2.02
Expand Equity Allocation

On average during the last six rising rate periods, reallocating 10% from a traditional U.S. equity allocation to global/international equities would have resulted in better returns with relatively similar risk, while reallocating 10% from traditional U.S. equities (typically large caps) to small cap equities would have resulted in enhanced risk-adjusted returns.

Return (%)
12.25
12.00 11.75 11.50 11.25 11.00
Portfolio F Portfolio E Portfolio D Traditional Expand Equity Allocation Portfolio F Portfolio E Portfolio D Traditional
F Add small cap equities

Add small cap equities

  • 50% U.S. Equity
  • 40% U.S. Bonds
  • 10% Small Cap Equities
E Add international equities

Add international equities

  • 50% U.S. Equity
  • 40% U.S. Bonds
  • 10% International Equities
D Add global equities

Add global equities

  • 50% U.S. Equity
  • 40% U.S. Bonds
  • 10% Global Equities
60/40 60/40 Portfolio - Traditional Portfolio

60/40 Portfolio - Traditional Portfolio

  • 60% U.S. Equity
  • 40% U.S. Bonds

Source: Calculated by PGIM Investments using data presented in Morningstar software products. All rights reserved. Used with permission. As of 12/31/2017. Average data represent the simple average of data for the most recent six rising rate periods: 10/1/01–3/31/02, 5/1/03–6/30/06, 12/1/08–12/31/09, 8/1/10–3/31/11, 7/1/12–12/31/13, 7/1/16–1/31/17. Rising rate periods are defined as a period when the 10-year U.S. Treasury yield rose by 75 basis points or more, and ends when the yield declines by 5% of its peak value. Returns for periods less than one year have not been annualized. Graph is hypothetical in nature and used for illustrative purposes only. Past performance is no guarantee of future results. See index definitions

Portfolio Average Return (%) Average Risk (%) Average Sharpe Ratio
60/40 11.19 7.28 1.91
D 11.36 7.24 1.92
E 11.55 7.25 1.96
F 12.06 7.51 2.04
Include Real Assets Allocation

On average during the last six rising rate periods, reducing 10% from both traditional U.S. equity and U.S. bond allocations to add 10% exposure to real assets would have provided stronger absolute returns versus a traditional 60/40 portfolio.

Return (%)
13.00
12.60 12.20 11.80 11.40 11.00
Portfolio I Portfolio H Portfolio G Traditional Include Real Asset Allocation Portfolio I Portfolio H Portfolio G Traditional
I Add natural resources

Add natural resources

  • 54% U.S. Equity
  • 36% U.S. Bonds
  • 10% Natural Resources
H Add MLPs

Add MLPs

  • 54% U.S. Equity
  • 36% U.S. Bonds
  • 10% MLPs
G Add real estate

Add real estate

  • 54% U.S. Equity
  • 36% U.S. Bonds
  • 10% Real Estate
60/40 60/40 Portfolio - Traditional Portfolio

60/40 Portfolio - Traditional Portfolio

  • 60% U.S. Equity
  • 40% U.S. Bonds

Source: Calculated by PGIM Investments using data presented in Morningstar software products. All rights reserved. Used with permission. As of 12/31/2017. Average data represent the simple average of data for the most recent six rising rate periods: 10/1/01–3/31/02, 5/1/03–6/30/06, 12/1/08–12/31/09, 8/1/10–3/31/11, 7/1/12–12/31/13, 7/1/16–1/31/17. Rising rate periods are defined as a period when the 10-year U.S. Treasury yield rose by 75 basis points or more, and ends when the yield declines by 5% of its peak value. Returns for periods less than one year have not been annualized. Graph is hypothetical in nature and used for illustrative purposes only. Past performance is no guarantee of future results. See index definitions

Portfolio Average Return (%) Average Risk (%) Average Sharpe Ratio
60/40 11.19 7.28 1.91
G 11.90 7.77 1.91
H 12.38 7.35 2.01
I 12.61 7.76 2.07
Diversify Your Portfolio

On average during the last six rising rate periods, having a diversified portfolio of fixed income, equity and real assets would have generated higher risk-adjusted returns than a traditional 60/40 portfolio.

Return (%)
15.00
14.00 13.00 12.00 11.00 10.00
Portfolio J Traditional Diversify Your Portfolio Portfolio J Traditional
J Diversified Portfolio

Diversified Portfolio

  • 50% Equities 30% U.S. Equity 15% Small Cap Equity 5% Int’l Equities
  • 40% Bonds 25% U.S. Bonds 7.5% SDHY 7.5% Floating Rate Loans
  • 10% Real Assets 3.75% Natural Resources 3.75% MLPs 2.5% REITs
60/40 60/40 Portfolio - Traditional Portfolio

60/40 Portfolio - Traditional Portfolio

  • 60% U.S. Equity
  • 40% U.S. Bonds

Source: Calculated by PGIM Investments using data presented in Morningstar software products. All rights reserved. Used with permission. As of 12/31/2017. Average data represent the simple average of data for the most recent six rising rate periods: 10/1/01–3/31/02, 5/1/03–6/30/06, 12/1/08–12/31/09, 8/1/10–3/31/11, 7/1/12–12/31/13, 7/1/16–1/31/17. Rising rate periods are defined as a period when the 10-year U.S. Treasury yield rose by 75 basis points or more, and ends when the yield declines by 5% of its peak value. Returns for periods less than one year have not been annualized. Graph is hypothetical in nature and used for illustrative purposes only. Past performance is no guarantee of future results. See index definitions

Portfolio Average Return (%) Average Risk (%) Average Sharpe Ratio
60/40 11.19 7.28 1.91
J 15.08 7.92 2.40

Explore Strategies Planning for Rising Rates

Explore strategies that may help optimize investment portfolios during rising rate periods and learn more about our funds.

Fixed Income Strategies

Manage duration

Floating rate loans generally have lower sensitivity to interest rate movements than other fixed income securities because interest rates on loans typically reset quarterly, based on 3-month LIBOR, which generally moves in a similar direction as the federal funds rate.


PGIM Floating Rate Income Fund

A style-pure loan fund with a strong performance history, an attractive yield, and a higher credit quality bias.

Seek higher yield

Yields from high yield bonds are generally higher than other yield-oriented investments. Shorter duration, higher-rated high yield bonds may provide the potential for higher income while mitigating both interest rate and credit risk.


PGIM Short Duration High Yield Income Fund

A shorter duration high yield bond fund with competitive yield that has produced stronger risk-adjusted returns than its peers, through its higher rated, lower duration approach.

Seek to neutralize interest rate risk

A duration-neutral, multi-sector approach can help mitigate interest rate risk. A well-diversified, duration-constrained, absolute return strategy can uncover alpha-generating opportunities while avoiding systematic exposure to rising rates.


PGIM Absolute Return Bond Fund

A diversified multi-sector bond fund that limits duration to a band of +/-3 years.

Equity Strategies

Expand the opportunity set

The current U.S. equity bull market has led to stretched U.S. valuations in many areas, while global economies in earlier phases of their growth cycles offer more attractive valuations. Expanding portfolios to include international equity exposure can better capitalize on compelling growth opportunities.


PGIM Jennison Global Opportunities Fund

A highly active global growth fund with the flexibility to identify and act on compelling opportunities across the globe while avoiding regions and sectors with limited prospects.

 

PGIM Jennison International Opportunities Fund

A unconstrained growth fund focused on finding the best equity opportunities outside of the U.S., which may be suitable for investors seeking to complement an existing U.S. equity allocation.

Seek larger growth potential

Rates typically rise in response to better economic conditions. This has historically provided a positive backdrop for small cap companies and strong returns in rising rate environments.


PGIM Jennison Small Company Fund

A small cap growth fund that seeks to invest in small companies that may be underpriced by the market and have above-average growth prospects.

Real Assets Strategies

Capitalize on rising demand

Most global economies are synchronized in growth mode and growing economies typically experience increased demand for raw materials, which would likely benefit producers/providers of natural resources.


PGIM Jennison Natural Resources Fund

A flexible natural resources fund that combines top-down commodity analysis with bottom-up fundamental research to uncover attractive investment opportunities in companies that own, explore, mine, process, and develop natural resource commodities.

Immunize against rising rates and inflation

MLPs typically use long-term fixed rate loans and contracts with inflation-adjustors, so are more insulated against the adverse effects rising rates and inflation can have on asset prices.


PGIM Jennison MLP Fund

A total-return focused MLP fund that seeks to invest in high quality midstream and MLP companies that finance operations that gather, store and transport energy.

Hedge against inflation

Stronger economies typically result in rising demand for commercial real estate space. This includes valuations for land and buildings and higher rents for new leases, while inflation escalators in lease agreements help mitigate inflation.


PGIM Global Real Estate Fund

A global real estate fund that seeks to capitalize on potential real estate opportunities anywhere in the world.

Rising Rates: Understanding changes in interest rates

Understanding how and why interest rates move can help us to make better informed decisions about our investments

Rising Rates: What it means for bond investors

We help demystify the mechanics of how bond prices are affected by interest rates and introduce solutions to help create a less interest-rate-sensitive portfolio.

Fixed Income Ideas for Rising Rates

After a brief pause, the Fed’s plan to implement a series of interest rate hikes is under way and ramping up. So what can you do?

Note: On June 11, 2018, the name of each Mutual Fund changed from Prudential to PGIM. The change does not affect fund symbols or management. More information on the renaming.

See SEC 30-day yields.

Short Duration High Yield measured by the Bloomberg Barclays U.S. High Yield 1-5 Year Index, Floating Rate Loans measured by Credit Suisse Leveraged Loan Index, Non-traditional Bonds measured by Morningstar U.S. Fund Non-traditional Bond category, U.S. Investment-Grade Bonds measured by Bloomberg Barclays U.S. Aggregate Bond Index, Small-Cap Equity measured by Russell 2000 Index, International Equity measured by MSCI All Country World ex-U.S. Index, Global Equity measured by MSCI All Country World Index, U.S. Equity measured by S&P 500 Index, Natural Resources measured by S&P North American Natural Resources Index, MLPs measured by Alerian MLP Index, REITs measured by S&P Dev REIT Diversified Index, and Inflation measured by Consumer Price Index.

The price-to-earnings (P/E) ratio relates the price of a stock to the per-share earnings of the company. P/E is calculated using a harmonic weighted average, which excludes outliers that can easily skew results. Risk is measured by standard deviation which depicts how widely returns vary around its average and is used to understand the range of returns most likely for a given fund. A higher standard deviation generally implies greater volatility. Sharpe Ratio is a risk-adjusted measure using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance.

The Alerian MLP Index is an unmanaged index composite of the 50 most prominent energy master limited partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for this emerging asset class. The Bloomberg Barclays U.S. Aggregate Bond Index is unmanaged and represents securities that are SEC registered, taxable, and dollar denominated. It covers the U.S. investment-grade fixed rate bond market with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. 1–5 Yr High Yield Index is a subset of the Bloomberg Barclays U.S. Corporate High Yield Index, focused on the 1-5 year part of the universe of U.S. dollar-denominated, non-convertible, fixed rate, non-investment-grade debt. The Consumer Price Index tracks changes in the prices paid by urban consumers for a representative basket of goods and services. The Credit Suisse Leveraged Loan Index is an unmanaged index that represents the investable universe of the dollar-denominated leveraged loan market. GDP stands for gross domestic product and is a monetary measure of the value of goods and services produced in a country’s borders. It is used to determine economic performance of a country. LIBOR is the world's most widely used benchmark for short-term interest rates. It serves as the primary indicator for the average rate at which banks that contribute to the determination of LIBOR may obtain short-term loans in the London interbank market (the 3-month U.S. dollar rate being the most common one), usually referred to as the "current LIBOR rate." The Morningstar U.S. Fund Non-traditional Bond Category contains funds that pursue strategies divergent in one or more ways from conventional practice in the broader bond-fund universe. The MSCI All Country World ex-U.S. Index is an unmanaged and a free-float-adjusted market capitalization-weighted index that is designed to measure the equity market performance for developed and emerging markets, excluding the U.S. It comprises approximately 22 developed and 23 emerging market country indexes. The MSCI All Country World Index is a market capitalization-weighted index designed to provide a broad measure of equity-market performance throughout the world. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index and is considered the most common benchmark for small cap equities. The S&P Dev REIT Diversified Index is a comprehensive benchmark of publicly traded equity REITs domiciled in developed markets. The S&P North American Natural Resources Index represents U.S. traded securities that are classified under the GICS® energy and materials sector excluding the chemicals industry and steel sub-industry. The S&P 500 Index is a market-weighted index of 500 of the largest U.S. stocks in a variety of industry sectors. Indices are unmanaged and an investment cannot be made directly in an index.

Fixed income investments are subject to interest rate risk, where their value will decline as interest rates rise. Investing in real estate poses certain risks related to overall and specific economic conditions, as well as risks related to individual property, credit, and interest rate fluctuations. Real estate companies and real estate investment trusts (REITs) may be leveraged, which increases risks. REITs may not be suitable for all investors. There is no guarantee a REIT will pay distributions given the inherent risks associated with the market. A REIT may fail to qualify as a REIT as defined in the tax code, which could affect operations and negatively impact the ability to make distributions. There is no guarantee a REIT’s investment objectives will be achieved. Master limited partnerships (MLPs) are subject to complicated and in some cases unsettled accounting, tax, and valuation issues as well as risks related to limited control and limited rights to vote, potential conflicts of interest, cash flow, dilution, and limited liquidity, and risks related to the general partner’s right to force sales at undesirable times or prices. MLPs are also subject to risks relating to their complex tax structure, including losing its tax status as a partnership, resulting in a reduction in the value of the MLP investment. Many MLP investments are in the energy sector, which subjects them to a greater degree to the risk of loss as a result of adverse economic, business, regulatory, environmental, or other developments affecting industries within that sector than if the investments were more diversified across different industries.

Disclaimer

Consider a fund's investment objectives, risks, charges and expenses carefully before investing. The prospectus and the summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and the summary prospectus. Read them carefully before investing.

An investment in our money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the funds seek to preserve the value of your clients investment at $1.00 per share, it is possible to lose money by investing in the funds.

Mutual fund investing involves risk. Some mutual funds have more risk than others. The investment return and principal value will fluctuate and investor's shares when sold may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee a Fund's objectives will be achieved. The risks associated with each fund are explained more fully in each fund's respective prospectus. Consult with your attorney, accountant, and/or tax professional for advice concerning your particular situation.

This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.

Investment products are distributed by Prudential Investment Management Services LLC, a Prudential Financial company, member SIPC. Separately Managed Accounts are offered through our affiliates. Jennison Associates and PGIM, Inc. (PGIM) are registered investment advisors and Prudential Financial companies. QMA is the primary business name of QMA LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM. © 2020 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM Real Estate, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

Prudential Financial, Inc. of the United States is not affiliated with Prudential plc. which is headquartered in the United Kingdom.

Investment Products: Are not insured by the FDIC or any other federal government agency, may lose value, and are not a deposit of or guaranteed by any bank or any bank affiliate.

 

1014045-00001-00  Ed. 12/2018  For compliance use only