* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Prepare for Rising Rates - JP Morgan Asset Management
Survey
Document related concepts
Negative gearing wikipedia , lookup
Financial economics wikipedia , lookup
Investment management wikipedia , lookup
Investment fund wikipedia , lookup
Public finance wikipedia , lookup
Present value wikipedia , lookup
Financialization wikipedia , lookup
Credit card interest wikipedia , lookup
Interest rate swap wikipedia , lookup
Credit rationing wikipedia , lookup
Securitization wikipedia , lookup
Interbank lending market wikipedia , lookup
Transcript
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. | 5 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. Confidentiality 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. Regulatory Status 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). | 15 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. 1116-1061-01 16 | PREPARING FOR RISING U.S. RATES