Federated Investors busy research team write that, “As speculation over rising-rate impacts continues, it's important for investors to keep in mind the key role that bonds have always played in diversified portfolios. And depending on an investor's goals, time horizon and ability to take risks, there are many reasons and approaches to investing in bonds ... including when rates are poised to rise.”

Consider short-duration bonds

Federated believe that these bonds tend to be less sensitive to rate movements compared to Intermediate- and long-term bonds largely because they are less exposed to economic cycles, which tend to span longer timeframes as shown by chart below.

Short-Duration Bonds Should Experience Smaller Losses Than Longer-Term Bonds

Source: Bloomberg as of 3/31/14

 (Federated notes: “This hypothetical chart illustrates 2- and 10-Year Treasury Bonds 1-year total return if interest rates were to instantly change by 50, 100 and 150 basis points based on the current yield as of 3/31/14.The current yield for the 2-Year Treasury is 0.41% and for the 10-Year Treasury is 2.75%. For illustrative purposes only. Actual interest rate changes will vary. Returns presented are not representative of the performance of any particular investment.”)

Uncovering income in a rising-rate environment

In their brochure on “Uncovering Income in a Rising-Rate Environment” (which has the standard ‘Not FDIC insured, may lose value, no bank guarantee’ caveat) Federated say that, as always, “A well-diversified portfolio is a solid first step”. They then list the investment strategies that investors “may want to consider” in a rising-rate environment where that when rates rise, not all asset classes response will be the same. They recommend an investment strategy, based on remembering that not all income sectors have declined during rising-rate environments, as follows:

1. increasing holding of short-term bonds as they should experience smaller losses than longer-term bonds
2. remembering High-Yield Bonds Have Delivered Positive Returns During Past Rising-Rate Periods 
3. considering floating-rate securities which “offer the unique benefit of generating income that keeps pace with changes in market interest rates”
4. considering emerging-markets debt because “Emerging Markets Have Generated Attractive Returns During Past Rising-Rate Periods”.

CTMfile take: Federated are addressing a key issue in the investment of spare cash and there is some important analysis here. This analysis also shows how difficult investing is in the current market.