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Are You Ready for Rising Rates?

The Question isn’t IF … The Question is WHEN

Interest rate changes are notoriously difficult to predict but, given where interest rates sit today, there’s not much question about what direction they may go next. Rising rates bring their own set of questions for investors, though. Questions like

  • What will happen to my fixed income investments when rates rise?
  • Am I diversified enough?
  • Is my portfolio allocated correctly?

 

Strategies to Consider for a Rising Rate Environment

The good news is you can take action to prepare. Talk to your advisor about these possible approaches:

1. Consider Credit-Oriented Sectors — Non-investment grade credit sectors, such as high yield corporate bonds and bank loans generally have been less correlated to interest rates than they have been to the overall economic outlook and corporate earnings.

2. Keep It Short — Short-duration bonds typically have lower sensitivity to interest rate changes than their longer-duration cousins.

3. Go Global — A global or internationally focused fixed income fund can potentially capitalize on differing business cycles and economic conditions around the world and may therefore be less impacted by rate changes in the U.S.

4. Take Stock — Hybrid strategies (funds that invest in both stocks and bonds) can capitalize on both the growth potential of equities when rates are rising due to economic growth and the income offered by bonds.

5. Stay Flexible — Multi-sector fixed income funds have the flexibility to invest across various sectors of the fixed income market, and fund managers typically shift the fund’s allocation over time to take advantage of different investment opportunities.

 

Footnotes

  1. Dividends are generally subject to state and local taxes, if any. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable.

What Are the Risks?
All investments involve risks, including possible loss of principal. Changes in interest rates will affect the value of a portfolio and its yield. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in a portfolio adjust to a rise in interest rates, the portfolio’s yield may decline. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Floating-rate loans and high-yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy.

For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

Franklin Templeton Distributors, Inc.

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