By Aye Soe
Rising interest rates certainly has become a central investment theme going into 2017. The 10-Year Treasury yield closed at 2.48% on January 27, 2017, representing an increase of nearly 103 bps from six months ago. Research has shown that equities tend to perform better following a rate hike, if inflation levels are moderate. However, return expectations on small-cap securities are mixed, as conventional wisdom dictates that small-cap securities require more capital, and therefore, higher borrowing costs for growth. It is therefore important to examine the potential performance behavior of small-cap indices in a rising rate environment.
To understand the sensitivity of small-cap securities to changes in interest rates, we performed a linear regression using the monthly returns of two headline small-cap indices - the S&P SmallCap 600 and the Russell 2000 - against monthly changes in the 10-Year U.S. Treasury rates. The regression equation is estimated on… Read More …