In the Loop

Higher rates call for a closer look at fixed income

March 22 2024
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Michael Doshier

For 30 years we were in a low, to lowering, to low, to almost no rate environment. And in one 18-month period, everything's changed.

Gillian Kemmerer

Where do you think interest rates are headed and what impact do interest rates have on fixed income securities?  

Michael Doshier

I think the easy answer is we all know that it's going to be higher for longer. I think the real question we need to ask ourselves is, what's the shape of that curve? And how much can I predict its length, its duration, the height…have we in fact passed the height? Knock on wood, I hope we have…. But what's the most important thing for advisors to think about is - has it shifted the operating environment for running fixed income inside of your plans and inside of your participant accounts? And I would argue that it has to have. For 30 years we were in a low, to lowering, to low, to almost no rate environment. And in one 18-month period, everything's changed, right?

So my guidance to advisors is - go back look a little deeper in two ways when you're dealing with your retirement plan clients. Look at the lineup itself and what are those fixed income options that you have available to those participants. And take another deeper look inside of the multi asset product, that’s likely your QDIA, and make sure you understand how well fixed income is being used as a diversifier inside of that glide path, which everybody knows the glide path and the equity fixed income, but when you do the double click you need to understand whether it's just a Bar cap agg representation of the fixed income instrument, or is it something with some more nuanced diversifiers and enhancers?

Over a period of 18 months, monetary stimulus implemented during the global pandemic have given way to tighter monetary policies and higher interest rates, leaving investors facing big changes to the fixed income market. As a result, fixed income investors in retirement plans and their advisors should take a closer look at fixed income investments from two key perspectives. First, retirement plans and advisors should look at the plan’s fixed income investment lineup to see if they’re appropriate for a new environment in which interest rates are likely to remain higher for longer. Second, take a look under the hood at how fixed income is being used inside multi-asset strategies, which likely serve as qualified default investment alternatives, and assess the potential use of diversifiers and enhancers.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the speaker as of March 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein, including forecasts and forward-looking statements, is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy or completeness. There is no guarantee that any forecasts made will come to pass.

Definitions:

Bar Cap Ag: Bloomberg Barclays US Aggregate Bond Index, renamed the Bloomberg US Aggregate Bond Index in 2021.

QDIA: Qualified Default Investment Alternative

Risk Considerations:

Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

All investments involve risk, including possible loss of principal. Fixed income securities are subject to credit risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall.

T. Rowe Price Associates, Inc.

T. Rowe Price Investment Services, Inc., distributor.

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202403-3466442

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