“Interest rates are going to rise, so I am going to wait to implement a long duration strategy.”
This is one of the most often cited reasons for delaying implementation of a long duration strategy. In its simplest form, the implication of this statement is correct: Rising interest rates should make future purchases of longer duration bonds less expensive — so why not wait?
However, there are three common mistakes that investors can make in waiting for interest rates to increase. The most obvious error investors make is incorrectly predicting if and when interest rates rise. Today, many investors simply assume that rates are low by historical standards, so they must rise. They do not adequately analyze the potential range of outcomes based on the fundamental economic and technical data, nor do they consider the timing of when interest rates might rise. In point of fact, U.S. interest rates have actually fallen since the beginning of 2011. Additionally, interest rates have steadily declined in the recent three-, five- and 10-year periods due to fundamental and technical drivers including a steady decline in inflation, changing risk allocation, weak domestic employment and a weakening housing market.
The second one that investors sometimes make concerns risk management. Today, many plans, while adopting a long duration or risk reducing strategy, do not realize the size of the risk position that they have in their financial assets relative to their liabilities.