FROM: Lisa Sorani, Manager of HR Employee Services LS -

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