Don’t Neglect Treasuries When Rates Are Rising

Don’t Neglect Treasuries When Rates Are Rising

When the Federal Reserve starts raising interest rates, the knee-jerk reaction for many investors is to reduce exposure to US Treasuries and load up on credit assets, which tend to be less sensitive to interest-rate changes.

Get The REITs eBook in PDF

Get our PDF study on REITs and our other investor studies! Save it to your desktop, read it on your tablet, or email to your colleagues.

But here’s something to keep in mind: rising rates eventually lead to slower growth. This causes long-term Treasury yields to fall faster than short-term yields rise, resulting in a flatter yield curve. In fact, during three of the past four Fed tightening cycles, the curve inverted, with the 10-year Treasury yield falling below the two-year yield.

Carlson Capital’s Double Black Diamond Jumps On Energy Sector Holdings

Black DiamondClint Carlson's hedge fund, Carlson Capital's Double Black Diamond strategy, gained 1.04% net of fees in the month of September. Following this performance, the fund has returned 9.87% net of fees for the year to the end of the month. Q3 2021 hedge fund letters, conferences and more The Double Black Diamond strategy makes up Read More

Why does this matter? Because as the curve flattens, the credit cycle fizzles out and Treasuries start to beat assets like high-yield bonds and equities that are more dependent on economic growth.

This is why it’s risky to cut back too drastically on interest-rate-sensitive assets. Instead, investors should diversify their credit exposure by gradually tilting toward Treasuries as the Fed tightens and the curve flattens.

A credit barbell strategy that pairs US Treasuries and credit in a single portfolio, and adjusts the balance as conditions and valuations change, can be an effective way to do that. Such a strategy also positions your portfolio to tilt back toward credit risk as conditions change and valuations become more attractive.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Article by Alliance Bernstein

Updated on

No posts to display