How_To_Play_Rising_Rates - How To Play Rising Rates by: Ben...

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How To Play Rising Rates by: Ben Levisohn Oct 02, 2010 SUMMARY: Bond yields hit record lows again this week. The latest rallying cry for bond bulls has been quantitative easing; prices have soared amid expectations that the Fed will once again buy bonds to reduce interest rates and boost the economy. In the short term, that would likely result in lower bond yields. But since the Fed can basically print money, investors would be wise to respect its ability to cause inflation if it desires. It wouldn't take much of a rise in rates to pose problems for investors. QUESTIONS: 1. ( Introductory ) The author talks about several strategies for dealing with rising interest rates. Differentiate between each of the following investments: cash, floating-rate debt, high-yield bonds, convertibles, TIPS, dividend-paying stocks, commodities. 2. ( Advanced ) How would investing in cash protect against rising interest rates? What is the downside of this approach? 3. ( Advanced ) How would investing in floating-rate debt protect against rising interest rates? What is the downside of this approach? 4. ( Advanced ) How would investing in high-yield bonds and convertibles protect against rising interest rates? What is the downside of this approach? 5. ( Advanced ) How would investing in TIPS protect against rising interest rates? What is the downside of this approach? 6. ( Advanced ) How would investing in dividend-paying stocks protect against rising interest rates? What is the downside of this approach? 7. ( Advanced ) How would investing in commodities protect against rising interest rates? What is the downside of this approach? Bond yields hit record lows again this week. Is it time to start positioning your portfolio for rising rates? At first blush such a move might seem like portfolio suicide. The main drivers of rising interest rates—economic growth and inflation—are nowhere in sight. In fact, Treasury yields could fall further if the Federal Reserve starts buying bonds again in a widely anticipated maneuver known as "quantitative easing." But step back from day-to-day market gyrations and a different picture emerges. Bond yields have fallen for most of the past three decades. A $1,000 investment in the U.S. government debt in 1980 would be worth about $12,970 today, according to the Ryan Labs Treasury Composite Index. Treasury prices, which move in the opposite direction of yields, have surged 9.3% this year alone. Now consider a different era: 1949 through 1979. Over that 30-year span, a $1,000 initial investment in Treasurys would have turned into a far humbler $2,950. That's because yields soared during the period; by 1980 the yield on the 10-year Treasury had reached a record high of nearly 16%.
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Given that Treasury yields have since plunged back down to 2.5% or so, how much further can they fall? That's the question some big investors are asking. In recent months bond-fund firms Pacific Investment Management Co. and others have pared back their holdings of Treasurys in favor of stocks (see "
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This note was uploaded on 03/18/2011 for the course FIN 615 taught by Professor Yan during the Spring '11 term at New York Institute of Technology-Westbury.

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How_To_Play_Rising_Rates - How To Play Rising Rates by: Ben...

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