The ratings agency has warned that investors could face “significant valuation losses” when interest rates inevitably rise from the current “abnormally low” levels.
Research by the group analysed the potential losses facing a hypothetical yet representative BBB-rated corporate bond. If interest rates were to rise to early-2011 levels, which would be a 200 basis point hike, the typical investment grade US corporate bond with a ten=year maturity could lose 15% of its market value.
Furthermore, a longer duration bond with a maturity of 30 or so years could see its value drop by around one-quarter.
“The timing, pace and magnitude of future rate increases is critical to how these risks play out. Monetary policy will likely remain accommodative for the next several years, reducing the near-term likelihood of a rate increase,” Fitch concluded.
“However, a continuation of low rates could exacerbate the ultimate risks to investors, since over time a larger share of portfolios would consist of lower-coupon securities.”
