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Rising Rate Implications For Income Portfolios


  • Rising rates have been top of mind for income investors since the start of the year.
  • The usual approach to rising rates has two problems. It fails to distinguish between two different rising rate environments and their different impact on assets.
  • And it uses the textbook definition of duration which is, at best, misleading as it ignores other important drivers of asset prices besides rates.
  • We discuss the two different types of rising rate scenarios, their impact on various assets and the role of empirical duration in security analysis.
  • We also highlight a number of different sectors and securities which can potentially remain resilient under one or both rising rate scenarios which we continue to hold in our Portfolios.
  • This idea was discussed in more depth with members of my private investing community, Systematic Income. Learn More »

Rising rates have been top of mind for income investors who are worried about the knock-on impact of higher rates on their holdings. The traditional advice investors receive on dealing with rising rates make two errors. First, it conflates two different types of rising rate environments and it focuses on duration, ignoring the much more relevant real-world metrics that capture how securities behave in the real world. We discuss both of these errors in the article and what investors can do to avoid them.

In this article we take a look at a number of investment options that have been relatively resilient in the face of rising rates. Our key takeaway is that investors who want to protect against higher rates have to decide which rising rate scenario is most likely and most damaging for their portfolios. This is because not all rising rate scenarios are created equal, so to speak, as they can have different consequences for various assets.

Breaking Down The Rising Rate Scenarios

Experienced investors know full well that there are different types of market dynamics and environments that cause interest rates to move higher. The reason this is important is that different market environments have different consequences for various assets. This is why positioning for higher rates can be a challenging proposition. One asset that responds favorably to a certain type of rising rate environment can do poorly in a different rising rate environment. What this means for investors is that they should think through which rising rate scenario is the one they are more worried about.

The first kind of rising rate scenario is one we call a messy surprise that happens on the back if either a hawkish monetary policy surprise or due to a surprisingly high inflation reading. A policy surprise could take the

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This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Systematic Income which features 3 different portfolios for a range of yield targets as well interactive tools for investors, daily updates and a vibrant community.

Analyst’s Disclosure: I am/we are long NCV, FIV, JEMD, JHB, PRIF.PE, ECCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

ROC has been persistent with NCV and NCZ. It seems like they are always over distributing.
@Sanya Robert ROC can be OK depending on the source of that return of capital. Amortization of tangible or intangible assets is a very common source of ROC and that is a good thing.
hawkeyec profile picture
Right now I am not exactly certain what I am supposed to be doing but what I am doing is getting my second quarter of very large upside surprises from my fund distributions. At the end of 2020 I earned 45% more than was estimated from my fixed income mutual funds (not index funds) and at the end of the quarter just completed my distributions were four times the YoY estimates based on 2020 in one of my trusts. These two shockers are going to cost me dearly in taxes as the marriage penalty is kicking me up two brackets due to the death of my wife at the end of 2019. Yesterday, my Vanguard LT UST fund paid me a huge unexpected capital gain, on top of one at the end of last year. I'll take all of this and as rates rise, reinvestments will improve, as will floating rates in various funds, eventually at least. I'm 76 so "real rates" are not as real as money is for tomorrow. Interesting how age changes one's perspective and how "not" one size fits all is for general advice.
Jeff Swan profile picture
@hawkeyec That's exactly why I don't have any mutual funds in my portfolio. Go with ETF's instead.
bullmoose62 profile picture
@hawkeyec Sorry to hear of your wife's passing. As to mutual funds, I stay away from them as they can go down in value and up in taxation that you have no control over. God bless.
mistydoc profile picture
“I neither know nor think that I know.” (Socrates in Plato). Most hope (or pray) for and invest expecting a reflationary recovery. But some mess in the mix (such as a France-like lockdown this fall or winter just when we thought COVID-19 was in the rear view mirror) is always possible. Reason to diversify, never panic.
Literally nothing to add or ask. High signal to noise ratio. Yet another great piece from this author.
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