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Summary
- Having a judicious mix of debt with equity provides stability to the portfolio returns.
- Picking up a value stock at a bargain could provide a decent margin of safety during market sell-off.
- An investor can also park his/her money in gold to hedge against the expectation of rising inflation.
Rising bond yields have become the recent scare for investors across the globe. The US 10-year Treasury yield has been continuously rising for the last few months. Last month alone, the yield was up by a massive ~23 per cent.
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Bond yield is the return an investor realises on a bond, and it is inversely proportional to the price of the bond. That means bond yields tend to rise with the fall in its price and vice versa.
Bond yield is considered a risk-free return; hence, higher yields tend to attract more investors, which is bad for the equity markets. Let's have a look at some of the workarounds an investor can do to withstand the market sell-off during the rising bond yields environment.
- A judicious mix of debt with equity
Investing in government securities when the yields are rising is a no brainer for fixed income investors. Apart from the regular cash flow of debt security, the government securities also provide an opportunity to invest in one of the safest assets out there.
During the market sell-off, the equities portfolio might take a hit, but at the same time, the income from higher yields would make up some of the difference. Also, having a judicious mix of debt with equity provides stability to the portfolio returns.
- Look for Value stocks
Value investing as a theme could be more conducive in the rising bond yield scenario. Picking up a value stock at a bargain could provide a decent margin of safety in case the market finds it difficult to sustain.
Also, a high premium paid for a growth-oriented company could backfire during turbulent times, as we have seen recently.
- Gold – A hedge against inflation expectation
One of the best hedges against inflation (if not the best) is gold. For ages, investors have been parking their money in gold to keep the purchasing power of their money intact. During the rising bond yields environment, generally, investors expect an inflationary period in anticipation of robust growth.
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Therefore, an investor can also park his/her money in gold to hedge against the expectation of rising inflation.
