BlackRock's Hiatt on Rising Rates
BlackRock's Cash Academy added a piece entitled, "Managing Cash When Rates Rise." The new video, featuring Director and Portfolio Manager Eric Hiatt says, "Today I'll be discussing how cash investors can prepare and respond to a rising interest rate environment. First, let's remember that interest rates and the market prices of interest-bearing securities generally move in opposite directions. So as interest rates rise, market prices on securities will likely decrease. Fortunately, there are a number of strategies that cash investors can implement to reduce market risk during a period of rising rates. These include: actively managing duration and credit exposure; seeking securities with less exposure to interest rate risk; and deploying a segmentation strategy across cash investments.... Duration is a measure of how sensitive a bond or portfolio of bonds are to changes in interest rates. The longer the duration, the greater the sensitivity. Although cash portfolios are by their very nature usually constructed with a shorter average duration, during a rising rate environment, cash investors may want to consider shortening their portfolio duration even further to minimize the price impact.... Investors can also prepare their cash portfolios for rising rates by adding exposure to sectors or credits that are less sensitive to rising interest rates. These may include: Floating rate notes, or Securities with a higher income stream, such as A2/P2 Commercial Paper or corporate bonds with less than 3 years to maturity." The piece adds, "A2/P2 commercial paper, for instance, may provide a meaningful increase in income for only a marginal increase in potential spread volatility.... Many investors in recent years have embraced the idea of segmenting their cash investments based on cash flow and liquidity needs. Similar to the concept of "immunization" in a bond portfolio, which aims to match durations of assets and liabilities, cash segmentation can help minimize reinvestment risk and reduce the cost of generating liquidity -- in all rate environments. We believe investors can apply some or all of these concepts to build a more efficient cash portfolio and manage their cash through any environment, even through rising rates."
