While our view on rising rates has yet to meaningfully materialize this year, our underlying thesis has not changed. In our view, it may be time for investors to think about how a bond portfolio may perform as a result of changes in Federal Reserve (Fed) policy.
One of the most crucial outcomes from 2008 was that many investors became more aware of the importance of downside protection and true diversification. Traditional allocations, as it turned out, generally did not provide enough diversification, and as the markets unwound, correlations between traditional asset classes increased.
In most cases, when investors think about international equities, they consider the fact that they are gaining exposure to the performance of the equities. However, that’s not the only investment they are making, they are also investing in the currency of the local market.
Since the dollar is the primary reserve currency of the world, investors typically seek exposure to the dollar via short-term assets when market sentiment begins to shift. As we explain, the U.S. dollar can serve as an effective hedge to market uncertainty when volatility unexpectedly spikes.
After a difficult market environment for bond investors in 2013, the prevailing consensus to start the year was that long-term bond yields would continue to rise in 2014. This view has yet to materialize in the markets.