Over the last several weeks I’ve written a few editorial pieces on the potential opportunities that can spawn as a result of higher interest rates.  In addition, we’ve talked a lot about our macro themes and the benefits of extending duration to capitalize on rate changes to hedge risk assets.

On Wednesday we hit somewhat of a short-term capitulation point in interest rates as they nudged up against the 2.5% level on the 10-year Treasury note.   We identified this as a relatively good point to begin making changes, since the 2.5% level has acted as a technical toggle-point over the last several years.  Our analysis concluded that this spot offered a decent level of support and/or resistance depending on whether rates were consolidated above or below the 2.5% level.

As a result of the ferocious move in rates, we began our first steps to transition our Strategic Income Portfolio’s bond sleeve from an overweight credit stance to a more balanced midpoint of quality and credit securities.  We came to that conclusion by asking ourselves a simple question:   Why continue to assume credit risk when we can increase the quality of our portfolio with only a minor change in yield?

In addition, high yield bonds have gotten through this rate adjustment largely unscathed, and were exhibiting positive returns.  Conversely, nearly every intermediate to long-term high quality Treasury, corporate or aggregate index was in the red so far this year.

Our Strategic Income Portfolio’s dual mandate of high income and low volatility led us to ultimately sell a dedicated ETF holding in high yield bonds and replace it with a more balanced actively managed ETF that is primarily made up of high quality bonds.  By doing so, we only had to sacrifice 100 basis points of annual yield, yet we ultimately positioned our portfolio to absorb the shock of any impending equity volatility that may present itself sometime during the second half of the year.  In addition, this move will allow us a greater opportunity for capital appreciation if interest rates head lower from these levels.

So despite a choppy equity market that has largely traveled nowhere during the span of 2015, we continue to seek out areas where we can improve our portfolio’s measure of risk and volatility in an otherwise tense tug-o-war between asset classes.