Little know facts on effects of US interest rate hike.

Below is a excerpt from Cara Esser, a senior analyst covering fixed income strategies on Morningstar's manager research team.  She like a few this week really point out that it is not so much the rise in the Fed rate that could ultimately cause a problem, but rather the strengthening of the dollar may cause less liquid higher yielding bonds fall in value, particularly those issued in US dollars by other countries.  She states "While the U.S. economy seems to have turned the corner, the story abroad is murkier. Generally, it's expected that the eurozone and Japan (the two main non-U.S. developed markets for bond investors) will be relying on quantitative easing much longer than the United States, thus delaying their own rate hikes. But the market for high-quality non-U.S. government bonds, including German bunds and Japanese government bonds, can track U.S. Treasuries when investors seek safe-haven assets. If the Fed continues to delay the rate hike, it could be seen as a signal that it's concerned about economic growth and may stoke fears of slowing global growth, and German and Japanese government bonds could strengthen. Under the same scenario, the dollar is likely to weaken, which would boost issues denominated in euros or yen.

Turning to the emerging world, investors are already nervous about what a U.S. rate hike may do to emerging-markets bonds. That's because emerging-markets countries with large amounts of dollar-denominated debt are already facing a more expensive debt load as their currencies have weakened against the dollar. Continued uncertainty about the timing of a Fed rate hike, or a rate hike itself, could cause more damage to the asset class as nervous investors continue to flee. Under that scenario, local-currency emerging-markets bonds, which have already been hit harder than issues denominated in U.S. dollars, are likely to suffer more as investors dump the riskier fare. 

What does this mean for an investor's portfolio? Predicting the timing and magnitude of interest-rate movements is a difficult task, and many bond portfolio managers believe it's folly to significantly change a fund's duration based on interest-rate predictions. Investors are better off sticking with an allocation that suits their long-term investment goals, and understanding how different bond funds might perform during various rate environments can help."

So, take a closer look at what you own.  You may have to do some digging, but know what is inside of that bond fund you own.

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