FROM: Lisa Sorani, Manager of HR Employee Services LS -
FROM: Lisa Sorani, Manager of HR Employee Services LS -
FROM: Lisa Sorani, Manager of HR Employee Services LS -
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THE CURRENT INTEREST RATE ENVIRONMENT<br />
• So why was the 1954 to 1960 drawdown so severe? Why was a 15.3% capital loss with a 8+<br />
year drawdown period associated with an environment where interest rates went up slowly<br />
and by only 1.8%?<br />
• The answer is the low 2.85% starting interest rates <strong>of</strong> the period<br />
o<br />
o<br />
Return on Fixed Income is composed <strong>of</strong> two components: capital gain/loss and interest<br />
When interest rates are low there is less interest to <strong>of</strong>fset a portfolio capital loss as well as less money<br />
to reinvest at the higher interest rates<br />
• From the previous slides we can see that the slow grind from a low interest rate can be a<br />
more bearish environment for Fixed Income than a more volatile period with higher rates (late<br />
1970s & early 1980s)<br />
• The key lesson to remember is that a slow rise in interest rates from a low starting rate can be<br />
very harmful for a Fixed Income portfolio<br />
o<br />
Potentially eliminating any return from a Fixed Income portfolio for quite a long period <strong>of</strong> time<br />
Pension Consulting Alliance, Inc. ││ EBMUD Fixed Income Discussion │ 13