Assessing the Damage from Rising Rates

Investing Strategies Bonds & Fixed Income Investments
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Interest-rates are on the rise. That drives previously-issued bond prices down. If the issuer doesn’t default, the damage is temporary, but uncomfortable nonetheless. So, how bad has the damage been?

This is how I structure my bond holdings (where ST Treasuries are considered ‘cash-equivalents’ and get put into a different bin).

50% ‘Defensive’ (triple-AAA’s to double-AA’s).

33% ‘Enterprising’ (single-A to triple-BBB).

17% ‘Speculative’ (double-BB or lower).

0% ‘Non-performing’ X (in default or BK).

The actual percentages achieved vary from account to account. But here’s one example, my account at IB. 



Code	Target       As-Found	  Paid	            Value	      P/L

D	50%	         16%	  $8,307	      $6,822	      -8%

E	33%      	  60%	  $68,914	      $66,047  	      -4%

S	17%            	  21%      $23,728	       $23,770	       0%

X	0%	           3%	    $3,252	          $671	     -79%


Totals	100%	          100%	    $114,201	        $107,310      -6%

Comment: The better the credit-quality, the more impacted by interest-rates. Ditto the longer the duration.

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What’s the CY on those holdings (by tranche, as a function of coupons received vs price paid)?

D, 4.0%
E, 5.6%
S, 7.2%
X, 0.0%

Not very impressive, right? compared to what pfds offer, or some ETFs.

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There was a moment recently where some investment grade corporates went on sale, and by on sale I mean YTMs of 7+% over a 3-5 year timeframe. That moment has passed, the market has rallied, and now those issuers are up 4-5%.

I’m thinking this is temporary. Yield curves globally are now inverted. I’m looking for some fat pitches on the long end in the 9 month timeframe.

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Thanks for the input, folks. Keep up the good work.