3 Fixed Income Ideas for Rising Rates

As the Fed continues to hike interest rates, now might be an opportune time to look at your clients’ fixed income portfolios.

October 11, 2018

Rising rates may present a significant challenge for investors, especially for those whose portfolios contain exposure to interest-rate-sensitive fixed income securities. As rates rise, bond prices generally decline and as a result, portfolios lose value. Strategies designed to reduce duration, generate yield and diversify exposure to less interest rate sensitive areas of the market can help mitigate the impact of rising rates. Here are three ideas to consider:


1. Reduce duration with floating rate loans

Floating rate loans generally have lower sensitivity to interest rate movements than other fixed income securities because coupons 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


2. Seek higher yield with high yield bonds

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


3. Neutralize interest rate risk with a diversified absolute return bond strategy

A well-diversified, duration-neutral, absolute return strategy can uncover alpha-generating opportunities while avoiding systematic exposure to rising interest rates.

PGIM Absolute Return Bond Fund
A diversified multi sector bond fund with a current duration of 0.9 years and the ability to adjust within a band of +/-3 years



Strategies like these tend to be less correlated to interest rate sensitive bond sectors and can provide ongoing diversification benefits. So, if rising interest rates have you rethinking fixed income, consider integrating some of these ideas to help mitigate the impact of rising rates and diversify fixed income portfolio exposure.


Alpha is a measure of the investment’s value-added based on its beta or market-related risk profile. A high value for alpha implies that the investment has performed better than would have been expected, given its beta profile. In contrast, a negative alpha indicates the investment has underperformed, given the expectations established by beta.
Duration measures the sensitivity of a bond’s price to a change in interest rates.
LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans.


1010709-00001-00 Ed. 10/2018 For compliance use only


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