By Dennis Tilley, Director of Alternative Investments
Published On 04/22/2014
There is practically universal opinion that interest rates will rise in the future, and that bond portfolios will suffer painful losses when this happens. At Merriman, we think the financial news media has blown this story way out of proportion, with inflammatory headlines designed to capture attention. Narratives include “the coming bloodbath for bond holders” and “the imminent bursting of the 30-year bond bubble.”
Our Chief Investment Officer, Dennis Tilley, recently wrote an article detailing three reasons why we’re not worried about rising interest rates. Here’s a quick summary:
1. The Experts and Consensus Are Often Wrong
History provides countless examples of when experts and/or a super-consensus have been wrong about the future of stock and bond movements. This is why we don’t use market predictions to manage client portfolios.
2. A Portfolio Duration of Four to Five Years Is Optimal
The sweet spot duration for Merriman investors holding bonds is in the maturity range of four to five years. This intermediate duration provides a nice compromise of offering overall portfolio stability, market crisis/deflation/recession protection, a long-term real return above inflation and – perhaps most importantly – the ability to quickly adapt to a rising-rate environment. With this duration, we believe our clients don’t have to worry about rising interest rates. The article provides more detail and charts illustrating this point.
3. Rising Rates Signal an Improving Economy
Finally, rising interest rates are likely to coincide with an economy that is improving, which is generally good for stocks. Yes, temporarily, bonds will lose value due to rising yields. However, we expect only single digit losses from our bond portfolio, not the “bloodbath” that some pundits seem to think will happen.
Read the full article here to get more insight.
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By Dennis Tilley, Director of Alternative Investments
Dennis serves as Lead Portfolio Manager for the Leveraged Global Opportunity Fund, L.P., a role he has held since 2001. Since joining Merriman in 1999, Dennis has also served as Director of Research (2000-2008), Director of Alternative Investments (2008-2013, 2019-present), and Chief Investment Officer (2013-2018). He sits on the Merriman Investment Committee and served on the Merriman Board of Directors from 2010-2012. Dennis currently writes for a blog about investing and trading at assetclasstrading.com.
Prior to joining our company, Dennis spent eleven years as an engineer performing research and development in electric propulsion. He published many papers and won numerous awards and patents in the field. Dennis holds a master’s degree in mechanical and aerospace engineering from Princeton University, as well as bachelor’s and master’s degrees in aeronautics and astronautics from the University of Washington.
Away from work, Dennis enjoys rock climbing, golf, running, reading about history, traveling with his wife, and spending winters in Tucson, AZ. He has two grown children."
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