Resource Logo

Hello, you are using an old browser that's unsafe and no longer supported. Please consider updating your browser to a newer version, or downloading a modern browser.

Receive Updates
Resource Arrow Back to all
Date: February 1, 2017
Category: Credit

2017 Credit Outlook: Interest Rates Challenge Fixed-income Investors

Interest rates fixed income investors

In 2016, equity markets ended the year on a high note. In 2017, investors must consider how to adjust their portfolios to account for significant changes in the economic backdrop.

First, and perhaps most importantly, we are at the beginning of a major shift in global monetary policy. Since the global financial crisis in 2008, central banks worldwide have pursued highly accommodative monetary policy, lowering interest rates to stimulate growth. However, as the economy continues to improve, central banks are beginning to take their foot off the gas. In the U.S., the Federal Reserve raised market rates by 0.25 percent this past December and signaled the potential for three additional hikes in 2017.

Second, there are significant fiscal changes on the horizon. The new administration under President Donald J. Trump has signaled potentially dramatic policy shifts. Paradoxically, at the same time the Fed has outlined a less accommodative monetary policy, the new administration has outlined a more accommodative fiscal policy, seeking to use tax cuts and government spending (i.e. defense, infrastructure) to boost growth.

While these measures may stimulate the economy, they pose a risk to fixed-income investors. Higher government spending and tax cuts can translate into increased federal debt, which could drive further interest rate increases. Additionally, if the economy gains momentum from these new measures, it could lead to inflation, which is potentially damaging to fixed-income investors because it erodes the value of fixed payment streams.

In short, 2017 appears to present a challenging backdrop for fixed-income investors. In particular, rising interest rates are bad news for investors whose portfolios are dominated by fixed-rate investments like corporate bonds, Treasuries, or municipals. When interest rates rise, fixed-rate assets take a hit because they must reprice to reflect new market values. Investors are left to either sell at a discount or watch the value of their investments slowly decline.

Credit asset performance rising interest rates

However, investors still need an allocation to fixed-income assets to provide much needed portfolio diversification, to help minimize volatility, and to generate the income return they desperately need. To enjoy these advantages while minimizing the impact of higher interest rates, investors should look for opportunities to invest in floating-rate assets.

One potentially attractive option is floating-rate corporate loans, also known as leveraged loans or senior secured loans.

Fixed income asset class returns rising interest rates


Floating-rate loans pay an interest rate that is tied to a benchmark, specifically the London Interbank Offered Rate (LIBOR), plus a certain spread. For example, a loan may pay LIBOR with a 1 percent floor plus 3 percent, which would translate into a total coupon of 4 percent. If LIBOR is 1 percent, then that loan would pay 4 percent. If LIBOR increased to 1.25 percent, the loan would pay 4.25 percent. In this way, floating-rate loans actually provide investors higher income when rates rise, mitigating the impact of rising rates on fixed-income investments.

Beyond rising interest rates, inflation also poses a risk to fixed-income investors because it decreases the future value of current income.

When inflation is high, a bond paying $500 a quarter is less valuable than when inflation is low, because the value of that $500 will decrease each quarter. In an inflationary environment, then, floating-rate loans are a more attractive fixed-income option because their coupon payments may increase over time.

As you head into the new year, you should consider how much interest rate exposure you have in your portfolio and how develop strategies to address interest rate risk.

As investors head into the new year, they should carefully consider how much interest rate exposure they have in their portfolios and develop strategies to address interest rate risk. In addition to traditional fixed-income investments like fixed-rate corporate, Treasuries, and municipal bonds, many investors may be holding so-called “bond proxy” investments like dividend-paying stocks in industries such as consumer staples and utilities. In addition to lofty valuations, these investments are also vulnerable to interest rate risk, much like their fixed-rate bond counterparts.

In the face of rising interest rates, investors should reassess their portfolios and consider switching to floating rate, fixed-income alternatives that may be better positioned to cope with today’s new economic realities.

Resource is the marketing name for Resource Real Estate, LLC, Resource Alternative Advisor, LLC, and their affiliates. Resource may distribute certain products through Resource Securities LLC, a wholly owned broker/dealer, Member FINRA/SIPC


The information contained herein does not constitute an offer to sell or a solicitation to purchase securities. Such offers or solicitations can only be made by means of a prospectus. Prior to making any investment decision, you should read the applicable prospectus carefully and consider the risks, charges, expenses and other important information described therein. The value of your investments may decline, and you could lose some or all of your investment. To obtain a prospectus containing this and other information, please call (866) 773-4120 or download the file from Read the prospectus carefully before you invest.


Resource has an interval fund that is distributed by ALPS Distributors, Inc. (ALPS Distributors, Inc. 1290 Broadway, Suite 1100, Denver, CO 80203). Resource Alternative Advisor, LLC, Resource Real Estate, LLC, their affiliates, and ALPS Distributors, Inc. are not affiliated.


Performance data quoted represents past performance. Past performance is no guarantee of future results and investment returns and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted above. For performance information current to the most recent month-end, please call toll-free (866) 773-4120 or visit


All statements and information other than statements of historical fact included on this website regarding strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used on this website, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. You should not place undue influence on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make on this website are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved because of the number of risks and uncertainties, many of which are beyond our control, including but not limited to uncertainties concerning the properties being operated and sold or refinanced, leverage and meeting debt service obligations, operating properties in different locations throughout the U.S., general, market or business conditions and changes in laws or regulations. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. To check the background of Resource Securities LLC or any registered individual, please go to FINRA’s BrokerCheck.