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The cost of waiting for interest rates to rise

The unforeseen pitfalls of “staying short” with your client’s fixed income allocation

Friday, September 10, 2010 – 4:13 AM by By Stephen J. Huxley, PhD and Brent Burns
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Brent Burns, Stephen Huxley: Since 1927, the probability of rates rising sufficiently fast enough for the [wait-in-cash] decision to be break-even is 11.1%.


Mike Flaherty

Mike Flaherty

November 15, 2010 — 7:59 PM

Great article. Can you walk me through the math/assumptions in your example? Thank you in advance for your assistance.

Stephen J. Huxley

Stephen J. Huxley

November 15, 2010 — 9:11 PM

The analysis was based on the yield curve going back to 1927. We computed how much rates would have to rise to make the cost of the 1-8 year portfolio drop from $787,000 to the cost of the 3-10 year prortfolio, $733,000, assuming the slope of the yield curve remains the same. We then looked to see how often rated had risen that far that fast. The answer was about 11% of the time.

Jeroen

Jeroen

December 24, 2014 — 8:49 PM

Hi,

Thanks for this piece. I have been trying what to decide what to do about this issue myself. What about putting your bond portion of your portfolio allocation into TIPS for the time being?

Would love to hear your opinion.

Regards,
Jeroen

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