Bond investing in a late economic cycle

Rising policy rates in the US may often act as a headwind for specific bonds, especially longer tenor ones, which are more sensitive to rising interest rates.
Rising policy rates in the US may often act as a headwind for specific bonds, especially longer tenor ones, which are more sensitive to rising interest rates. PHOTO: REUTERS

With the Federal Reserve expected to hike rates in the United States again by the end of this year and another two to three times in 2019, it is understandable that bond investors are worried. Conceptually, as we head through the late stage of an economic cycle towards the end, corporate profitability (and the ability to repay bond holders) typically peaks.

Meanwhile, rising policy rates in the US may often act as a headwind for specific bonds, especially longer tenor ones, which are more sensitive to rising interest rates. These risks seem accentuated by historically high valuations in some bond markets and the possibility of rising inflation after years of calm, eating away at still-meagre bond yields.

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A version of this article appeared in the print edition of The Sunday Times on December 02, 2018, with the headline 'Bond investing in a late economic cycle'. Print Edition | Subscribe