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The Specter of Rising Interest Rates

Sponsored By Northern Trust

Topics:: Banking & Capital Markets > Debt/Bonds; Budgeting & Planning

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Abstract:: A combination of liquidity introduced to the financial markets as a result of the 2008 financial crisis and wide budget deficits among developed economies have raised investor concerns about inflation and fixed income investments. With interest rates near historic lows, investors are holding cash in lieu of a diversified bond allocation to take advantage of future interest rate rises.

Avoiding fixed income is not a risk-free endeavor however. We do not expect a significant acceleration in inflation in developed regions like the United States, Europe and Japan, and as current bond prices already incorporate an expectation of rising interest rates, we think the current risk of owning fixed income is probably lower than some investors might think.

Given corporate pension fund sensitivity to changes in interest rates, this paper also illustrates the impact of interest rate increases on pension funding ratios and considers the use of pension funding ratio as a potential guide to extending duration.

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Released: July 07, 2011

Length: 16 pages

Format: PDF (2538 kb)

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