The prospect of rising interest rates poses both a challenge and an opportunity for fixed income investors.

Jan 2021
Julianna Donovan

Because bond prices typically move in the opposite direction of changes in interest rates, rising rates pose a potential headwind to expected bond returns. In cases where bonds are held until final maturity, this is
not a risk. The benefit of rising interest rates to bond investors is that maturing bonds can be reinvested at higher rates. If economic and employment conditions remain favorable, Fed rate hikes will likely continue into next year. After living with short-term rates at or close to zero for years, this is welcome news.

Howland Capital’s approach remains steady. Even with low interest rates, short-term bonds and bond funds make sense within a portfolio to provide capital for distribution needs and generate reliable
income. In times of market stress, high-quality bonds are less volatile than stocks.

Bonds also tend to be negatively correlated to stocks, with bond prices moving up when stock prices fall. Though not always the case, this relationship can help preserve capital. The credit component of corporate
bonds remains very favorable; most corporate bond issuers have strong and stable balance sheets as well as easy access to additional liquidity and capital. We pay close attention to the credit quality and issuer risk of the bonds held in our portfolios and expect credit conditions to remain very strong in the years ahead.

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