Fixed Income

Rising rates, reduced returns?

Investors in income yielding assets have become nervous that returns will be impaired if rates rise in the future.

08/22/2017

Introduction

Investors in income yielding assets have become nervous that returns will be impaired if rates rise in the future. Our analysis shows that these concerns may be overdone as most income assets historically continued to generate positive returns during periods of rising rates. Some assets have even performed better during such periods. Even looking at income on its own, levels have also been fairly stable when yields have risen and some assets have actually seen income levels increase during such periods. With income investing, patience is the key.

A number of asset classes with income-generation properties have been popular among investors. These tend to be fixed income assets or assets which share some of the income-generating characteristics of fixed income. They include government bonds, investment grade credit, high yield debt, real estate investment trusts (REITs), emerging market debt (EMD) and high dividend equities. With cash rates and government bond yields falling to very low levels around the world, these income-generating assets have been increasingly in demand and have consequently enjoyed strong returns over recent years. However, with the US Federal Reserve raising interest rates, several rate-setters at the Bank of England voting for a rise and questions being raised about whether the European Central Bank will be less accommodative, many investors are now wondering if the party is over and it is time to sell out of these asset classes.

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.