Large Investors Prepare for Higher Interest Rates

Tuesday, 12 Mar 2013 08:22 AM

By Dan Weil

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Interest rates already have risen from their record lows, and at some point the Federal Reserve will begin to reverse its easing program, pushing them up even higher.

So investors are taking steps now to deal with higher rates later, including big-time players such as BlackRock, TCW Group and Pimco, The Wall Street Journal reports.

Their tactics include purchasing floating-rate debt, whose yields rise along with the overall rate structure; interest-rate swaps; Treasury inflation-protected securities (TIPS); and derivatives betting on losses by Treasurys.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

With rates now so low, the concern is that just a slight rise in rates will be devastating to portfolios of Treasurys.

"We don't subscribe to the view that once the fire starts, we'll be able to outrun everybody through the door," Stephen Kane, managing director for U.S. fixed income at TCW, tells The Journal.

"Rates could be up 50 basis points before your traders can get all the sell orders through."

Rick Rieder, co-head of fixed income for the Americas at BlackRock, agrees.

"For 30 years, interest rates had declined and fixed income was the safe part of the portfolio," Rieder tells The Journal. "Now fixed income is becoming something you have to be more active in."

The 10-year Treasury yield stood at 2.06 percent late Monday, up from a record low of 1.38 percent last July.

At Pimco, Co-chief Investment Officer Bill Gross trimmed the weighting of Treasurys in the firm’s lynchpin Total Return Fund, to 28 percent of assets in February, down from a six-month high of 30 percent in January.

He has recommended against long-term Treasurys and in favor of inflation-protected bonds, as central banks around the world continue to pursue huge easing programs. Gross also has talked up Mexican and Brazilian bonds.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

© 2014 Moneynews. All rights reserved.

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