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 2018 Credit Report: Rising Rates Continue to Hamper Increasingly Illiquid Fixed-income Market

The Federal Reserve continues to follow the script, raising the fed funds rate by another 25 basis points at its recent September meeting, its eighth interest rate hike since 2015. This predictability follows the economy’s lead, with strong economic news continuing to guide the path to rate normalization.

Gross domestic product (GDP) increased at an annualized rate of 4.2 percent last quarter, the fastest growth rate since 2014, while unemployment sits below four percent in a labor market quite literally out of workers. The Labor Department recently announced that filings for unemployment benefits fell to a 48-year low. There are more job openings than available workers – 11 openings per 10 unemployed workers – while Americans are also quitting at their highest rate since 2001, a strong signal of more promising job prospects. This tight labor market is finally starting to lift wages, as average hourly wage growth increased 2.9 percent year-over-year in August, the sharpest jump since June 2009.

Inflation, like wage growth, had been mysteriously absent during this lengthy expansion until recently. Core inflation, as measured by the Fed’s preferred benchmark, the index for Personal Consumption Expenditures (PCE), is now sitting right around its two-percent target.

We believe that the market’s default position should assume (absent a disruption) a 25-basis point rate increase each quarter into 2020. However, there are signs of price pressures, which could prompt the Fed to hike more aggressively.

The Trump administration recently announced tariffs on over $500 billion of Chinese goods, which could strain the availability – and therefore the cost – of goods. Tariffs will begin at a rate of 10 percent, but could increase to 25 percent next year.

The rate differential between the United States and Eurozone has driven demand for the U.S. dollar in recent months, which has helped keep inflation in check. This dynamic may soon shift. This summer, the European Central Bank announced that it will conclude its quantitative easing program at the end of 2018 and indicated the potential for rate hikes in 2019. Less accommodative monetary policy in Europe could lessen U.S. dollar strength and unleash pressure on overseas goods.

In short, the backdrop portends continued struggles for traditional fixed-income vehicles.

Is a liquidity crisis next?

Outside of interest rates, there is another possible peril for bond investors. Since the financial crisis, the world has experienced nearly a decade of credit creation supported by central bank liquidity. We would argue that credit has guided the current economic cycle. Corporate debt sits at a level that has coincided with previous recessions. In the next downturn, after years of absorbing debt instruments, investors will inevitably look to sell.

But here comes the tricky part: to whom? Before the financial crisis, investment banks provided liquidity to global credit markets. The Volcker Rule and other regulatory hurdles have removed these “too big to fail” institutions from their role as market makers.

Liquidity risk has now been “socialized” in a sense, pushed down to buyers and sellers. Investors now hold this risk in their portfolios. As we saw in the Taper Tantrum in 2013 – which experienced a sudden re-pricing of credit and sent tremors through emerging markets – the deterioration of credit market liquidity can lead to rapid price deterioration.

So, what happens next? Retail investors, unfortunately as the next downturn will reveal, predominantly gain exposure to the bond and loan market through daily liquid mutual funds.

When the music stops, these funds may experience sudden downward price gaps in the value of the holding accelerated by little liquidity. At the same time, these funds may face a wave of redemptions from investors trying to sell. These funds will have only one means to meet these redemptions: selling their underlying bonds and loans into a panicked market.

With major investment banks sidelined by regulation and smaller banks lacking the capital to absorb the risk from a massive selloff, individual retail investors may pay the price. Under those circumstances, even the most highly liquid bond markets may not hedge against portfolio risk.

Positioning portfolios for today’s risks

Investors must be cognizant of the key risks facing fixed-income investing, including continued rate hikes and an increasingly illiquid bond market. Corporate bonds have experienced diminishing returns of -1.60 percent year-to-date through September, due in part to their fixed coupons.1 Buying bonds as rates rise comes with an opportunity cost of capital. If rates continue to climb, bonds bought today will come down. Instead, investors should examine floating-rate assets, which pay higher interest as rates rise, helping reduce interest rate risk. Also, give consideration to the liquidity risk in fixed-income portfolios. The interval fund structure creates a long-term capital base, and more importantly, likely allows a fund to remain fully invested during market dislocation. An interval fund can then take advantage of cheap prices, while many liquid bond funds are selling at losses to satisfy redemptions.

1 Bloomberg. Barclays US Aggregate Total Return Index. 1/1/18-9/30/18.

Resource Securities LLC, Member FINRA/SIPC.

The above communication is intended to be educational in nature and provide additional resources for current and/or prospective clients. Resource derives most, if not all, of its revenue based on the sale of its various products. While subject to change, Resource has a non-traded REIT and two interval funds available to investors. This is neither an offer to sell nor a solicitation of an offer to buy a Resource product; an offering is made only by prospectus or other offering memorandum. This information must be preceded or accompanied by a prospectus in order to understand fully all of the implications and risks of the offering. Neither the Attorney General of the State of New York nor any other state regulators have passed on or endorsed the merits of a Resource product. Any representation to the contrary is a criminal offense.

Investing in real estate or credit products involves a high degree of risk and uncertainties which should be carefully considered when making an investment decision. If any of the risks were to occur, the value of your investment may decline, and you could lose some or all of your investment. Some of these risks related to available Resource products may include the following: no public market exists for the investment and liquidity by a specified date is not guaranteed; the purchase price of your investment may not reflect the underlying value of the security; limited operating history for the program; no investments identified to acquire with the equity raised; dependence on an external advisor to select investments and to conduct operations; payment of substantial fees to the advisor that increase the risk investors will not earn a profit on their investment; conflicts of interest; the use of leverage to acquire investments; restrictions on the ownership and transferability of an investment; distributions may be sourced from offering proceeds or borrowings. Refer to the applicable offering document for a complete set of risk factors. Offering materials and offering-specific risk factors for Resource products may be found at

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.