Navigating rising rates with Asian and high-yield credits; financials to outperform

SINGAPORE (Sept  10): Bond prices generally fall during rising interest rate cycles, while their yields expand. Still, there are strategies available to bond fund managers as they navigate the US Federal Reserve’s rate-hike cycle. Since December 2015, the US federal funds rate has risen to 2%, from 0.25%. The Fed has been very clear in its guidance, which points to two more rate hikes this year, bringing the FFR to 2.5%, and taking the total to four rate hikes. Two rate hikes have already occurred this year, and a third is due this month, with the fourth likely to be scheduled towards year-end. 

Next year, the Fed could implement a further three rate hikes. US data continues to show a growing economy amid rising inflation. The US inflation rate for the 12 months to July 31, 2018 is 2.9%, according to the US department of labour. US GDP growth for 2Q2018 was revised up to 4.2%. 

Although the US is in a rate-hike cycle, other developed economies are in different cycles. The European Central Bank has signalled that its rates are likely to remain “steady” till the summer of 2019, indicating that EU interest rates are unlikely to rise for the next nine months.  

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