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

Q3 2017 Credit Report: The End of Quantitative Easing and Fixed-income Portfolios

quantitative easing ending bubble bursting

The last few months have been a roller coaster for interest rates, yet this short-term instability masks an upward trend driven by monetary policy changes.

ten year treasury rates chart


In our view, the evidence clearly indicates that we are in a rising rate cycle. In her September testimony, Federal Reserve Chair Janet Yellen signaled that the central bank would raise rates once more this year, bringing the total number of rate hikes in 2017 to three. The Fed further indicated markets should expect three hikes in 2018. In both 2015 and 2016, we experienced only a single rate increase. The uptick in the pace of rate hikes indicates a clear shift in monetary policy.

More importantly, Yellen also announced that the Fed will finally begin winding down its balance sheet.

During the financial crisis, the Fed accumulated a $4.3 trillion portfolio of mortgage and Treasury assets in a process known as quantitative easing (QE), which was intended to help drive down rates. In 2014, the Fed ended its buying program. However, it has maintained its balance sheet; when assets reach maturity, they have been replaced dollar-for-dollar, so the Fed has continued to provide an important source of market liquidity.

In September, however, Yellen confirmed that the central bank would start running down its balance sheet at a rate of $10 billion a month. For the last decade or so, the Fed has been a reliable source of liquidity, helping to keep rates low. As the Fed starts to reduce its holdings, this liquidity support will reverse and rates will move higher.

A similar process is underway in Europe. The European Central Bank (ECB) has been pursuing its own aggressive QE program, buying about €60 billion of bonds a month and amassing a balance sheet of around €2 trillion.

In September, the ECB announced that it would end its QE program over the next few months and begin unwinding its balance sheet as early as next year. This means a second vital source of liquidity is withdrawing from credit markets, which should further boost interest rates.

We may also see some support for higher rates from fiscal policy. Attempts to repeal the Affordable Care Act (ACA) have failed and the Republican-controlled Congress is eager to chalk up a win before the 2018 midterm elections. Given this motivation, it is likely that we will see at least a modest package of corporate and individual tax cuts by the end of the year.

The White House’s proposed tax plan relies on economic growth to offset the cost of tax cuts. However, at least in the short-term, there is not likely to be enough growth to cover those costs. Therefore, the tax cuts will probably initially be financed by an increase in the federal deficit. Deficit spending means that the government will have to increase borrowing, which is likely to drive up interest rates further, especially when combined with a less accommodative monetary backdrop.

In short, virtually all key developments in monetary and fiscal policy are pointing to rising rates. For traditional fixed-income investors, this poses a challenge.

In short, virtually all key developments in monetary and fiscal policy are pointing to rising rates. For traditional fixed-income investors, this poses a challenge.

[Related:Hear portfolio manager Michael Terwilliger’s audio summary of this Commentary]

As rates rise, credit assets that pay a fixed rate of interest lose value. Fixed-income investors may therefore see the value of their portfolios fall. They may also find that their fixed-rate portfolios fail to deliver the rising income they are seeking.

This underscores the value of floating-rate assets like corporate loans. Floating-rate assets pay interest tied to a benchmark, and when the benchmark rate rises, these assets pay more. They can thus help protect the value of an investor’s principal in a rising interest rate environment.

However, it is important to select assets with caution. As interest rates rise, the risk of defaults may rise for less creditworthy issuers. Default rates currently remain muted, but investors may be wise to focus on assets that offer an additional layer of default protection.

For example, senior secured loans enjoy a senior position in the capital structure and are generally secured by borrowers’ assets. In the case of default, recovery rates for these loans have been historically much higher than those of more-junior and unsecured loans.

corporate debt recovery rates chart


Interest rates are rising. Fixed income investors may be wise to act now to protect their portfolios from the threat of rising rates by investing in floating-rate assets. These assets may offer rising income and capital preservation. Investors may also consider seeking out the additional risk mitigation offered by senior loans.

This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security. The materials included herein are the property of Resource and may not be repurposed in a separate likeness without the express written consent of Resource.

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.