Download Prepare for Rising Rates - JP Morgan Asset Management

J.P. MORGAN PRIVATE BANK
Preparing for Rising U.S. Rates
December 2016
Many clients with exposure to fixed income securities are asking how they should prepare for a rising U.S. interest
rate environment. We have a constructive view on U.S. economic growth for 2017, and as a result, we believe the
Federal Reserve will continue the rate normalization process it began in December 2015.
We recognize that short-term and long-term interest rates have
already risen due to fading disinflationary fears on the back of
IN B R IEF
improved growth and an increase in policy uncertainty in the
•We believe we will see an ongoing recovery in the
U.S. economy in 2017, and a Federal Reserve (Fed)
that continues normalizing rates.
United States after the recent election. While we don’t see a
sustained rise in U.S. rates from here, we believe we could still
see a more significant period of price movement in U.S. bond
markets. Similar to what we wrote in June 2015, we believe this is
an opportunity to carefully evaluate fixed income holdings.
In this piece, as we did previously, we briefly touch on liquidity
risk—that is, the ability to quickly convert a bond into cash by
selling without dramatically affecting its price—which has become
a more meaningful consideration since the financial crisis.
Positioning your portfolio in a rising rate
environment
As the economic cycle shifts and markets evolve, new risks and
opportunities could emerge that may require you to evaluate your
•As a result of better growth prospects and fading
disinflationary forces, we could see significant
movement in prices for U.S. bond markets.
•Even a small increase in interest rates can lead
to portfolio losses.
•The changing landscape creates potential
opportunities and challenges in the fixed
income markets.
•Diversify to minimize fixed income interest rate
and credit risk.
•Avoid surprises; know what you own.
fixed income holdings to ensure that your allocations are aligned
with your risk tolerance and goals.
What follows is a refreshed summary of our perspective on the
implications of rising rates for fixed income investors, particularly
Talk to your J.P. Morgan representative to better
understand the changing climate and to make
sure your portfolio is properly positioned.
for clients who hold fixed income positions outside of actively
managed portfolios.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
This material is for informational purposes only, and is not an offer or solicitation to enter into a transaction. The views and strategies described in the material may not be
appropriate for all individuals. Past performance and outlooks are never a guarantee of future results. Please read definitions, risk and tax considerations, and other important
information at the end of this document.
2 | PREPARING FOR RISING U.S. RATES
We also offer a brief overview of liquidity, and why we believe it’s
We believe the Fed will increase the Federal Funds rate (the short-
a key consideration when thinking about investing in individual
term interest rate at which banks lend balances to each other
bonds or adding bond funds to an investment portfolio. Your
overnight) in December and continue the normalization process in
personal circumstances and goals should dictate the best course
2017. While we have already experienced a rise in both short- and
for you.
long-term interest rates in the United States this year, we don’t
consider another sustained rise in rates as likely, mainly due to
We hope this information prompts a conversation with your
J.P. Morgan representative to help you better understand what
you own and to assess your portfolio’s overall allocation to fixed
income given the possibility for higher rates and a more significant
price movement.
our view that economic growth remains secularly low and inflation
remains well contained. At the same time, central bank policy in
Europe and Japan is expected to keep global yields low for the
foreseeable future. Consequently, certain global investors, such
as central banks and foreign insurance companies looking to buy
high-quality developed market bonds, may likely find attractive
Our thoughts on the direction of interest rates
relative value in U.S. fixed income versus other markets.
For some time, interest rates in the United States had been on a
Even so, we recognize that uncertainty has increased following the
declining trend. Since the credit crisis began to unfold in 2007,
recent U.S. presidential election, and for that reason we consider it
the Federal Reserve has kept short-term rates artificially low
prudent to take a close and careful look at how your fixed income
to stimulate the U.S. economy, increasing rates only once, in
allocation is positioned.
December 2015. Now that the economy is on more solid footing,
and some of the disinflationary shocks have faded, the Fed will
likely resume the normalization cycle.
We anticipate a moderate rise in rates
in 2017
The table shows our rate outlook for U.S.
Treasury bonds of various maturities for yearend 2017, as well as current and year-end 2015
rates.* The column on the far right shows the
hypothetical change in basis points from today
to year-end 2017 (a basis point is the equivalent
of 0.01%—or 1/100th of a percent).
Interest rates and bond prices: Interest rates are one of the
biggest drivers of bond prices. As interest rates rise, the value of
a high-quality bond or bond fund falls, and vice versa.
U.S.
TREASURIES
YEAR-END 2015
RATE
NOVEMBER 21,
2016 RATE
2017 YEAR-END
RATE OUTLOOK
HYPOTHETICAL
CHANGE
2-Year
1.05%
1.07%
1.50%
+0.43%
5-Year
1.76%
1.78%
2.00%
+0.22%
10-Year
2.27%
2.32%
2.50%
+0.18%
30-Year
3.02%
2.99%
3.00%
+0.01%
Source: J.P. Morgan Private Bank.
*Rate outlook is as of November 2016. Subject to change.
Data shown is for informational purposes only and is not a guarantee of future results.
| 3
Our view on investing in fixed income
Our portfolio managers have implemented additional measures for
Interest rate risk
counterparty coverage, improved information systems to better
Compared to the last 30 years, we believe you need to think
assess liquidity and maximizing our access to bond dealers—to
differently about how you invest in fixed income, due both to
enhance our ability to navigate an environment of lower liquidity.
an anticipated turn in the interest rate cycle, and changing
These portfolios also take full advantage of the continuous research
characteristics of the markets and available options. Interest rates
of our credit analysts. Strategies managed by third-parties are also
are one of the biggest drivers of bond prices, and while it has taken
subject to our ongoing due diligence.
longer than we expected, the approaching period of rising rates will
likely cause the value of bonds and bond funds to fall.
our actively managed fixed income portfolios1—such as expanded
For clients who oversee their fixed income allocations themselves
on a self-directed basis, we can help you assess the liquidity
Liquidity risk
of the bonds you own. For a better understanding of liquidity
The 2007–2008 financial crisis raised important questions about
dynamics in the fixed income marketplace, refer to “A primer on
liquidity in fixed income markets. While the global banking system
bond liquidity.”
is safer than it has been in the past, it is our view that there is
generally less liquidity in fixed income markets today than before
the financial crisis, both in the United States and abroad. The
changing liquidity picture may create additional volatility in bond
prices, especially in times of stress.
Liquidity: Liquidity is the ability to quickly convert a bond into
cash (sell) without dramatically affecting its price. Liquidity is a
dynamic feature of bond investing that can change abruptly in
response to supply, demand and other market forces.
One of the main reasons for this trend is that structural changes
in the marketplace have made it more difficult for dealers to carry
inventory or conduct market-making activity.
As a result, dealers have shifted from a principal-based business
model (taking securities in inventory and selling them later) to an
agency model (primarily matching buyers and sellers), and are less
able to serve as a buffer during times of market volatility.
Bank products and services, including certain discretionary investment management products and services, are offered by JPMorgan Chase Bank, N.A. and its affiliates.
1
4 | PREPARING FOR RISING U.S. RATES
A primer on bond liquidity
When evaluating a bond for purchase, you should consider its
liquidity characteristics, along with other factors, such as interest
rate risk and credit risk. In the current environment, we believe it
is important to understand how liquidity may impact your bond
investments.
What do we mean by liquidity? Liquidity is the ability to quickly
convert a bond into cash (sell) without dramatically affecting its
price. Liquidity is a dynamic feature of bond investing that can
change abruptly in response to supply, demand and other market
forces. A surplus of sellers of a given bond may either cause a
delay in selling, or widen bid and ask spreads that could lead to a
large discount in its price.
How do we assess liquidity? Several factors affect a bond’s
liquidity (see table below). These factors can help determine
whether a particular bond is a good fit in an overall portfolio and
if it is suitable for your time horizon and risk tolerance. When you
need immediate access to your funds at any time, you should
keep in mind that lower credit quality bonds, such as high yield
and distressed debt, are generally less liquid than higher-quality
bonds. In most markets, like U.S. Treasuries, new issues are
generally more liquid than securities that have been issued years
before. As a general rule, “buy-and-hold” investors who expect to
keep their bonds to maturity are impacted less than short-term
or trading-oriented investors who expect to be able to sell bonds
whenever they want.
FACTOR
GREATER LIQUIDITY
LESSER LIQUIDITY
Outstanding issue size
Larger
Smaller
Number of market makers
Greater
Lesser
Trading volume
Higher
Lower
Bid/Offer spreads
Tighter
Wider
Quote sizes
Larger
Smaller
Credit quality
Higher
Lower
Demand
Greater
Lesser
Dealer balance sheet
Larger
Smaller
Why does liquidity matter?
Liquidity matters because it can affect a bond’s price or the ability to sell a bond at any given moment. One way to measure liquidity
is the bid and offer spreads. During periods of low volatility, the bond bid and offer spread is relatively small; during periods of higher
volatility or market stress, bond prices can fluctuate dramatically. As with any asset, many investors would like to be able to sell a bond
when they want to, without being forced to sell at a discount. If that flexibility is less important, you should be adequately compensated
for the risk of that inconvenience.
In some situations, a bond’s illiquidity may offer a benefit. If you are a buy-and-hold investor, and liquidity is not a priority, you may
prefer to sacrifice liquidity for the potential compensation associated with holding illiquid bonds. Periods of market illiquidity may also be
seen as opportunities to buy good assets at discounted prices.
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If you own core bonds or bond funds
Core investment-grade bonds are an important
component of diversified portfolios, but bear in mind
that as interest rates rise, bond prices will fall.
Despite our belief that U.S. interest rates will rise, core bond
As mentioned previously, we believe the Fed will continue
rate environment, keep an eye on total return, and be prepared to
normalizing short-term interest rates in 2017. If you buy (or bought)
holdings remain an important component of diversified multi-asset
portfolios. Core bonds are often the anchor of a portfolio when
equity markets are volatile. If you buy these securities in a rising
experience capital losses as bond values fall.
fixed rate, investment-grade bonds and intend to hold them until
they mature, rising U.S. rates won’t have any effect on the income
you receive. You will continue to earn or accrue interest at the rate
expected when the bond was bought. However, when U.S. interest
rates rise, and if you need to sell a bond before it matures, be aware
that the value may have declined and you may incur a loss.
In contrast to individual bonds, bond mutual funds don’t have a final
maturity, and therefore provide no assurance that your full principal
will be returned. Depending on the composition of a mutual fund,
the total return may go down as rates rise.
Total return: A crucial measure of performance, it represents your
interest income plus your capital gains or losses.
What this means for core bond or bond
fund holders
•Understand the potential risks of bond and bond fund
investments, including, among others, interest rate,
credit, inflation and liquidity risks.
•Bonds, especially high-quality bonds and funds that
invest in them, are sensitive to changes in interest rates.
•Consider total return, not just current yields.
•Core bond holdings are still an important part of a
diversified portfolio.
•Consider investing in floating-rate bonds.
While you may enjoy higher income on new bonds purchased when
rates rise, the value of bonds purchased at an earlier date will fall.
Fund managers actively monitor interest rates and manage against
those losses, but it may take time for mutual fund portfolios to
reflect the new higher rate regime. In some cases, the manager may
be limited to the kinds of bonds (e.g., maturities and qualities) that
can be purchased. Alternatively, clients can consider discretionary
core bond portfolios in a separately managed account (SMA), with
the ability to customize around yield or maturity targets.
•If a temporary jump in longer-term interest rates occurs
(as a result of speculation and fear rather than market
fundamentals such as demand, inflation or credit risk),
and you prefer to maintain control of your investment
portfolio, you may look to buy longer-dated bonds to
lock in those higher market rates. This is particularly
relevant if you are an income-focused, long-term
investor.
6 | PREPARING FOR RISING U.S. RATES
If you are a U.S. investor and own municipal bonds
or municipal bond funds
Municipal bonds and bond funds are also subject to
interest rate risk. Tax advantages may make municipal
income more attractive relative to high-grade corporate
bonds, offering a cushion against rising interest rates.
We suggest tax-sensitive U.S. investors implement
municipal exposure through laddered strategies to
help reduce interest rate risk.
Many of our clients invest in the municipal bond market due, in
part, to their historically low correlation to stocks. Unlike
What is laddering?
Laddering refers to a portfolio of bonds whose maturities are
spread out over a certain period of time, such that a portion
of the portfolio will mature each year.
We believe that laddered bond portfolios, held to maturity,
serve a dual purpose, as they help insulate the portfolio
from interest rate and reinvestment risk, while generating a
predictable income stream.
taxable government and corporate bonds, the interest earned
A ladder can be implemented as a pure “buy and hold” strategy
on most municipal bonds is exempt from federal and, in some
in self-directed (brokerage) accounts, or as a managed ladder
cases, state income taxes for U.S. investors. Moreover, the
with some active trading.
interest income generated by municipal bonds is not subject to
the 3.8% Medicare Contribution Tax on unearned income, which
took effect in January 2013.
On a tactical basis, for brokerage accounts, we may suggest
individual bonds that have longer durations if we see an interesting
market opportunity.
Municipal bonds may at times be more attractive than corporate
bonds of similar quality on an after-tax basis. In order to make
a relevant comparison between the two, it is important to be
aware of tax-equivalent yields.
What this means for municipal bond or
municipal bond fund holders
• Some tax-sensitive investors tend to overweight their
Tax-equivalent yield: Municipal bonds offer lower yields due to
their tax-exempt status. The tax-equivalent yield is the yield you
would have to earn on a taxable bond investment to equal the
yield of a comparable tax-free municipal bond.
Tax-Equivalent Yield = T
ax-Free Municipal Bond Yield
1 - (Tax Rate)
portfolios with municipal bonds. While tax advantages are
important, so is diversification across bond sectors to help
reduce risk and volatility.
• As with all bond holdings, complementing a core
municipal bond portfolio with other types of fixed income
and investment styles, such as international bonds or
high-quality corporate bonds, may provide more income,
In today’s municipal bond market, we recommend a “laddered”
reduce interest rate risk, and increase the probability of
approach for high-quality municipal bond portfolios.
higher total returns in an environment where we think
interest rates could rise.
| 7
If you own high yield bonds or bond funds
High yield bonds provide diversification and potentially
higher yields. Depending on your investment goals and risk
tolerance, you may wish to consider an allocation to high
yield bonds as a component of your overall portfolio.
U.S. high yield distress ratios have fallen
Percentage of Par
90
80
The U.S. high yield bond market2 has had a remarkable ride over
70
the last few years. With energy companies comprising 18% of the
60
index in 2014, volatility in oil prices led to a negative 5% return in
2015, and the subsequent recovery in oil prices has driven high yield
U.S. HY Distress Ratio
HY Energy Distress Ratio
50
40
returns to double digits thus far in 2016.
30
As oil prices have recovered, distress ratios in the market have
decreased. Distress ratios are important because higher ratios
20
typically signal an increase in credit stress.
10
At current valuations, we feel that investors are fairly compensated
for default risk going forward, with yields on the high yield index at
2
5.5% over Treasuries, and we believe that high yield bonds still may
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: Deutsche Bank. Data as of October 31, 2016.
make sense in a diversified fixed income portfolio.
In addition to interest rates, credit quality also affects risk. High
yield bonds may offer a higher yield than government bonds, for
example, but you must be willing to accept a greater risk of default.
What this means for high yield bond or high
yield bond fund holders
• We believe that it may make sense to own high yield bonds
The high yield market should benefit from the improvement in U.S.
in a diversified fixed income portfolio for two reasons: higher
growth, as most high yield issuers are U.S. focused.
yields and muted expected defaults.
Credit or default risk: Relates to the probability that a borrower (the
bond issuer) will default on its debt obligations. Investors typically
demand more yield for greater perceived risk.
• While bond defaults would affect the value of a high
yield investment, we believe that you are currently being
compensated adequately for this risk.
• Given the historical performance of high yield credit spreads
(the yield advantage higher-risk bonds offer investors) in rising
rate environments, and our view of modestly rising longer-term
U.S. interest rates and below-average expected defaults, we
are comfortable holding some high yield fixed income bonds in
diversified portfolios in 2017.
2
Refers to JP Morgan domestic HY index, which is designed to mirror the
investable universe of the U.S. dollar high yield corporate debt market.
8 | PREPARING FOR RISING U.S. RATES
If you own U.S. dollar emerging market bonds or
bond funds
U.S. dollar-denominated emerging market bonds may
provide higher yields and increased diversification for
investors. The market for these bonds has both matured
and greatly expanded in the past decade. For example,
the emerging market corporate bond market is now
about $1.6 trillion in size, larger than the U.S. high yield
market at $1.3 trillion. These bonds or bond funds may
be appropriate if you understand the asset class and
wish to be compensated for assuming higher risk.
Much like the high yield market, emerging market bonds
experienced a high degree of volatility during the financial crisis. In
fact, from 2007 to the end of 2008, the “spread” or yield over U.S.
Treasuries of the emerging markets sovereign and corporate bond
indices jumped from about 1.5% over U.S. Treasuries to between
9% and 10% over U.S. Treasuries, before recovering in 2009. Today,
these emerging market bond indices pay between 3.5% and 4%
over U.S. Treasuries.
As the Fed begins to normalize rates, and especially if the U.S. dollar
continues to strengthen against emerging market currencies, we
could see elevated volatility in emerging markets. That said, for
some investors, these spreads over U.S. Treasuries may represent a
compelling investment opportunity.
In addition to interest rate risk, U.S. dollar-denominated emerging
market bonds are often subject to two levels of credit risk, including
country- and company-specific risk. For example, a Mexican
sovereign bond has Mexico risk, while bonds issued by a Mexico
manufacturer have sovereign- and company-specific risk. You
should be aware of these additional risk factors.
Many emerging market countries do not appear as vulnerable as
they did prior to the “taper tantrum” in 2013, as some currencies
have adjusted and we have seen pro-market regimes take over in
countries such as Brazil and Argentina.
But with the new U.S. administration set to take office, uncertainty
has increased for some emerging markets, especially those that
featured prominently in the campaign discussions, and could drive
risk premia higher across emerging markets in the near term as
policy details emerge.
What this means for emerging market bond or
bond fund holders
• Exposure to a mix of U.S. dollar-denominated emerging
market bonds may be advantageous in a portfolio setting,
especially those originating in countries and companies that
are benefiting from the current macro economic environment.
• We believe that it is prudent to focus on security selection
and higher credit quality of emerging market sovereigns and
corporations.
| 9
If you own bank preferred stock
Bank preferred stocks are income-generating securities
that have characteristics of both common equity and
debt instruments. Like common equity, preferred
stock is junior to debt and deposits in a bank’s capital
structure. This means that in a bankruptcy situation,
creditors of a bank, such as depositors and debt holders,
have priority over preferred holders. It is because of
this subordination, and the additional credit risk that
investors take on, that preferreds have a higher yield,
and tax-advantaged treatment for U.S. taxpayers,
compared to bonds of the same issuing institution. Why
the tax advantage? Their distributions are considered
dividends and not interest, and so they are taxed at the
capital gains rate, and not the income tax rate.
Preferreds share characteristics with taxable fixed income
instruments, such as investment-grade and high yield bonds, in that
they have both credit and interest rate risk. Preferreds have credit
risk in that they depend on the issuing institution to make payments.
As with bonds, the prices of preferreds have an inverse relationship
with changes in interest rates. When interest rates fall, the value
of bank preferreds generally goes up, and when interest rates rise,
the value of preferreds generally falls. We continue to monitor not
only interest rate movements, but also the effect those movements
might have on the flows and risks of the preferreds sector.
Preferreds can either be issued as $25 par or $1,000 par securities.
Even though most preferreds are perpetual instruments, they
vary in their interest-rate sensitivity depending on the structure.
For example, fixed-to-float securities typically have less duration
than fixed-for-life, all else being equal. Similarly, many preferreds
are callable, and those with a shorter call date typically carry less
outright duration risk than longer-call securities.
As you can see in the graph (on page 10), the value of the S&P
Preferred Stock Index (SPPREF)3 fell sharply during the 2013 “taper
tantrum” when 10-year interest rates rose to almost 3.00% from
1.63% in a span of five months. During that period, the value of this
index fell almost 10%. We have had a similar, though more muted,
reaction since October 1, 2016, as rates rose to 2.30% from 1.65%,
and the preferred index fell about 5.00%.
3
The S&P Preferred Stock Index is designed to measure the performance of non-U.S. traded, developed market preferred stocks.
10 | PREPARING FOR RISING U.S. RATES
S&P Preferred Stock Index has fallen in value during periods of rising interest rates
5%
860
840
4%
820
800
3%
780
760
2%
740
1%
720
10Yr Treasury Yield (LHS)
S&P Preferred Stock Index (RHS)
0%
11/2011
11/2012
700
11/2013
11/2014
11/2015
680
11/2016
Source: Bloomberg. Data as of November 29, 2016.
If the quality of a bank’s underlying credit is improving at the same
time interest rates are rising—a situation analogous to today—any
losses due to interest rates could potentially be mitigated by
improved credit spreads. Still, if interest rates rise too much or too
quickly, the rates loss may be much higher than any gain from credit
spread compression.
What this means for bank preferred
stock holders
• Given improving credit fundamentals over the past few
years for most U.S. banks, as well as a low interest rate
environment, we believe preferred stock has presented an
opportunity for clients to gain higher tax-advantaged income.
• With a market that has begun to price in potentially higher
rates under the new presidential administration, we are more
concerned with the effects of rising rates on bank preferreds.
We believe it is prudent for clients to ensure that their
portfolios are appropriately sized, and that they hold some
mix of floating-rate and fixed-to-float structures to mitigate
interest rate risk.
• We advocate that clients consider a more actively engaged
approach to investing in preferreds to be able to respond to
a changing interest rate environment.
| 11
If you currently borrow at a floating rate,
you may want to consider options to fix your rate
In addition to reviewing the impact of rising rates
on your investment portfolio, it’s equally important
to reassess your borrowing strategy to ensure your
liabilities are appropriately structured.
It is no surprise that many clients have taken advantage of record
low interest rates over the last eight years by implementing floatingrate borrowing strategies to access low-cost capital. With the recent
increases in rates and the belief that short-term and long-term U.S.
interest rates will continue to rise, we encourage you to review your
financial goals and evaluate the right mix of fixed- and floating-rate
debt.
LIBOR and U.S. Treasury yield curve
2.36%
2.50%
2.18%
11/25/2015
11/25/2016
Interest Rate
2.23%
1.83%
2.00%
2.01%
1.41%
1.50%
1.66%
1.12%
0.94%
1.25%
1.00%
0.61%
0.93%
0.50%
0.41%
0.00%
0.23%
1m LIBOR
3m LIBOR
2 yr
3 yr
Tenor
5 yr
7 yr
10 yr
Sources: Bloomberg, Department of Treasury. Data as of November 25, 2016.
Lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to extend a line of credit or make loans available under the line
of credit. Any extension of credit is subject to credit approval by the lender in accordance with the terms contained in definitive loan documents.
12 | PREPARING FOR RISING U.S. RATES
Key considerations
Before making any changes, it’s important to consider the following:
•What is your view on interest rates? Do you expect rates to rise,
and if so, to what degree?
•What is the purpose, amount, source of repayment and expected
tenor of your current or expected future debt?
•Do you expect to sell assets/receive additional sources of income
in the near term?
•What is your tolerance for interest rate risk? How much financial
flexibility do you have if your cost of debt were to increase more
than expected?
What this means for clients who have a U.S. dollardenominated floating rate line of credit •There are a number of borrowing strategies to consider,
within the context of your personal situation and particular
objectives, in any rate environment.
•Be mindful that rising rates may impact the cost of your
floating-rate loan.
•Speak with your J.P. Morgan representative to review your
outstanding loans and current financial condition to determine
the best options. Certain borrowing strategies may not be
suitable for all investors.
Depending on your needs and objectives, you have several options to consider:
FLOATING-RATE
LINE OF CREDIT
FIXED-RATE LOAN
UP TO 5 YEARS*
If your financing needs are
shorter-term, it may be
advantageous to borrow at a
floating rate.
For medium- or longer-term
borrowing needs, fixed-rate
loans can guarantee fixed
interest payments and hedge
against interest rate risk.
FLOATING-RATE LINE OF
CREDIT + INTEREST RATE
DERIVATIVE**
Consider using an interest rate
derivative if you have longerterm borrowing needs or a
strong view on rising interest
rates. Interest rate derivatives,
such as swaps, swaptions or
caps, may be utilized to hedge
higher rates and customized to
manage future liabilities.
U.S. MORTGAGE
If you are looking to lock in
a rate for a longer period
of time, consider using a
mortgage to match longterm assets with long-term
liabilities.
*Available tenor varies by region.
**Additional eligibility and documentation requirements may be required. Any discussions involving a specific swap transaction or strategy must be handled by a
designated Associated Person of the Firm’s Swap Dealer.
| 13
In summary
With the anticipated growth for the U.S. economy, the pro-growth
agenda of the new U.S. administration and expectations for policy
changes by the Federal Reserve in 2017 lead us to believe that U.S.
interest rates will gradually rise. As markets respond to a changing
economic cycle, new risks and opportunities may emerge for you as
an investor in both stock and bond markets.
If you have exposure to U.S. fixed income instruments, you
should remember that all bonds, even investment-grade bonds,
are subject to changing interest rate risks and can be negatively
impacted by rising rates. Diversifying fixed income allocations and
staying informed are key in a changing interest rate environment.
Whether you already own bonds—individually or through managed
strategies—or are planning to purchase them, it is important to
understand the principles that underlie fixed income investing.
As with any investment, it is important to know what you own.
Take the next step
Today’s ever-changing markets require investors to be informed.
We encourage you to have a conversation with your J.P. Morgan
representative to better understand the changing climate and
ensure that your investment portfolio is aligned with your
long-term goals.
14 | PREPARING FOR RISING U.S. RATES
AUTHORS
Solita Marcelli
Managing Director and Global Head of
Fixed Income, Currencies and Commodities
for J.P. Morgan Private Bank
Philip Guarco
Managing Director and Global Head of
Fixed Income Strategy
for J.P. Morgan Private Bank
Irena Alagic
Executive Director, Global Fixed Income Strategist
for J.P. Morgan Private Bank
This material is intended for your personal use and should not be circulated to any other person without our permission, and any
use, distribution or duplication by anyone other than the recipient is prohibited.
Past performance is never a guarantee of future results.
IMPORTANT INFORMATION
Purpose of This Material
This material is for information purposes only. The information provided may inform you of certain investment products and
services offered by J.P. Morgan’s private banking business, part of JPMorgan Chase & Co. The views and strategies described in the
material may not be suitable for all investors and are subject to investment risks. Please read this Important Information in its
entirety.
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This material is confidential and intended for your personal use. It should not be circulated to or used by any other person, or duplicated
for non-personal use, without our permission.
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In the United States, Bank products and services, including certain discretionary investment management products and services, are
offered by JPMorgan Chase Bank, N.A. and its affiliates. Securities products and services are offered in the U.S. by J.P. Morgan Securities
LLC, an affiliate of JPMCB, and outside of the U.S. by other global affiliates. J.P. Morgan Securities LLC, member FINRA and SIPC.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
In the United Kingdom, this material is issued by J.P. Morgan International Bank Limited (JPMIB) with the registered office located
at 25 Bank Street, Canary Wharf, London E14 5JP, registered in England No. 03838766. JPMIB is authorized by the Prudential
Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In addition, this
material may be distributed by: JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking
authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers; J.P. Morgan (Suisse) SA,
regulated by the Swiss Financial Market Supervisory Authority; JPMCB Dubai branch, regulated by the Dubai Financial Services
Authority; JPMCB Bahrain branch, licensed as a conventional wholesale bank by the Central Bank of Bahrain (for professional
clients only).
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In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and
Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material
is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary
investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMIB
and/or JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are
advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. Receipt of this material does not constitute an offer or
solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation.
To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities
in compliance with the laws of the corresponding jurisdiction.
Non-Reliance
We believe the information contained in this material to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its
accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. We do not
make any representation or warranty with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference
purposes only. The views, opinions, estimates and strategies expressed in it constitute our judgment based on current market conditions and are subject to change without notice.
We assume no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ
from those expressed by other areas of J.P. Morgan, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any
projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward looking statements
should not be considered as guarantees or predictions of future events.
Investors may get back less than they invested, and past performance is not a reliable indicator of future results.
Risks, Considerations and Additional Information
There may be different or additional factors which are not reflected in this material, but which may impact on a client’s portfolio or investment decision. The information contained in
this material is intended as general market commentary and should not be relied upon in isolation for the purpose of making an investment decision. Nothing in this document shall
be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document is intended to constitute a representation that
any investment strategy or product is suitable for you. You should consider carefully whether any products and strategies discussed are suitable for your needs, and to obtain
additional information prior to making an investment decision. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial,
accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and
its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial
transactions. Contact your J.P. Morgan representative for additional information concerning your personal investment goals. You should be aware of the general and specific risks
relevant to the matters discussed in the material. You will independently, without any reliance on J.P. Morgan, make your own judgment and decision with respect to any investment
referenced in this material.
You should consider the investment objectives, risks, and charges and expenses of the fund described in this profile carefully before investing. For this and other important
information about the fund, obtain the prospectus or offering document, which is available upon request from J.P. Morgan Securities LLC (“JPMS”). Read the prospectus or
offering document carefully before you invest.
Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or
redeemed prior to maturity may be subject to substantial gain or loss.
High yield bonds are speculative non-investment grade bonds that have higher risk of default or other adverse credit events, which are appropriate for high-risk investors only.
Preferred investments share characteristics of both stocks and bonds. Preferred securities are typically long-dated securities with call protection that fall in between debt and
equity in the capital structure. Preferred securities carry various risks and considerations, which include: concentration risk; interest rate risk; lower credit ratings than
individual bonds; a lower claim to assets than a firm’s individual bonds; higher yields due to these risk characteristics; and “callable” implications, meaning the issuing
company may redeem the stock at a certain price after a certain date.
Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to
alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and
local taxation and the Alternative Minimum Tax (AMT).
Loans and lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to either extend any loan or line of credit, or make loans available
under a line of credit. Any extension of credit is subject to credit approval by J.P. Morgan and, if approved, the terms contained in the definitive loan documents. Loans
collateralized by securities involve certain risks and may not be suitable for all borrowers and investors. A decline in the value of securities pledged as collateral may require the
borrower to provide additional collateral and/or pay down the loan or line of credit in order to avoid the forced sale of the securities by the lender. Please read your loan
documents carefully so that you understand your obligations.
Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency
exchange rates and differences in accounting and taxation policies outside the United States can raise or lower returns. Some overseas markets may not be as politically and
economically stable as the United States and other nations. Investments in emerging markets can be more volatile.
J.P. Morgan may hold a position for itself or our other clients that may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this
document.
JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent,
advisor or lender to such issuer.
References in this report to “J.P. Morgan” are to JPMorgan Chase & Co., its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the marketing name for the private
banking business conducted by J.P. Morgan.
If you have any questions or no longer wish to receive these communications, please contact your usual J.P. Morgan representative.
© 2016 JPMorgan Chase & Co. All rights reserved.
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