Understand interest-rate risk

Investors usually look to fixed-income investments to provide a safer haven from equity market fluctuations. However, investors need to be aware of the risks associated with fixed-income investments, particularly interest-rate risk.

What some investors may not understand is that when interest rates rise, bond prices go down (and vice versa).

Interest rates fall, bond prices rise. Interest rates rise, bond prices fall.

How active management can help

These uncertainties do not mean that all fixed-income investments are equally vulnerable to interest-rate risk. There are a number of ways that active fixed-income managers can minimize the impact of a rising interest-rate environment and still search out attractive opportunities.

For example, rising rates can have more of an impact on longer-duration bonds (i.e., bonds with a maturity of 10 or 20 years) than shorter-term bonds. Therefore, if expectations are that interest rates are going to rise, managers can invest in government or corporate bonds with shorter maturities (i.e., in the one- to five-year range).