While it’s smart to stay current on the trajectory of rising interest rates, allowing them to change the way you think about your fixed-income investments is assigning them too much power. Like death and taxes, the reasons you should consider allocating a portion of your portfolio to fixed income should never go away.

Instead of spooking fixed-income investors, the stress caused by rising interest rates should remind us of the reasons why we invest in fixed income in the first place.

An examination of the historical performance of fixed income in the periods during and immediately following a rate rise has revealed a potentially more favorable outlook for investors who were committed to the long-term role that bonds typically play in a portfolio.

How a Rate Rise Reminds Us Why We Invest in Fixed Income

1

Typically, news of rising rates is met by fi xed-income investors with as much enthusiasm as a root canal. That’s because when rates rise in the short term, bond prices generally fall and their value drops—an unpleasant proposition to say the least. It’s enough to make investors forget the reasons why they hold bonds in their portfolios and reconsider their long-term asset allocation choices.

But the fi xed-income/rising rates narrative could contain a surprise twist. First of all, not all types of fi xed income react the same way when rates rise. FIGURE 1 below lists the periods of rising rates and the performance of various fi xed-income assets during those periods.

Data Sources: Morningstar, Ned Davis Research, 1/18We defi ned a period of rising rates by a 20% change in the 10-year U.S. Treasury yield.

Past performance is not indicative of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. Please see back page for index defi nitions. For illustrative purposes only.

A Twist in the Rising Rates Plot

FIGURE 1: Rising Rates Can Affect Bond Returns NegativelyFixed-Income Returns During Periods of Rising Rates (%)

2

Period

Bloomberg Barclays US Aggregate

Bond Index1

Bloomberg Barclays

US Treasury Index 2

Bloomberg Barclays US MBS

Index3

Bloomberg Barclays US

Corporate Investment Grade

Bond Index4

Bloomberg Barclays US 1-3

Year Government/Credit Bond Index5

Credit Suisse

Leveraged Loan

Index6

Bloomberg Barclays US

Corporate High-Yield

Bond Index7

Bloomberg Barclays

Municipal Bond Index9

S&P 500

Index8

7/2/79-2/26/80 -7.21 -2.65 -9.45 -12.38 1.36 N/A N/A N/A 14.50

6/16/80-9/30/81 -5.68 -1.45 -13.82 -9.71 4.69 N/A N/A -15.17 8.94

5/4/83-5/30/84 2.09 2.90 2.54 -0.88 7.21 N/A N/A 1.56 1.628/29/86-10/16/87 1.54 0.26 3.90 1.82 4.97 N/A 6.77 4.65 35.6810/15/93-11/7/94 -4.82 -3.86 -1.13 -6.59 1.37 12.01 3.07 -3.92 2.09

1/18/96-7/5/96 -2.96 -1.84 0.35 -4.19 1.47 3.95 3.46 -0.45 9.59

10/5/98-1/20/00 -1.40 -3.02 1.17 -2.34 1.91 4.28 4.41 -1.95 34.3611/7/01-4/1/02 -2.07 -4.33 -0.36 -2.22 -0.32 3.99 4.79 -1.26 3.076/13/03-6/14/04 -2.16 -4.81 0.49 -2.80 0.00 8.23 10.47 -1.58 14.546/2/05-6/12/07 2.01 1.21 2.78 1.51 3.31 7.18 9.10 2.55 13.363/17/08-6/13/08 -1.56 -4.08 -1.20 -0.96 -1.53 3.70 5.75 1.06 6.1112/18/08-4/5/10 5.79 -2.77 5.31 17.27 3.65 33.46 58.47 13.84 26.2710/6/10-2/8/11 -2.67 -4.36 -1.21 -2.83 -0.39 5.33 5.66 -5.13 14.87

9/22/11-10/27/11 -1.21 -2.00 -0.89 -0.66 -0.09 0.25 2.69 -0.65 10.30

12/19/11-3/19/12 -0.20 -2.19 0.46 1.56 0.26 3.27 6.65 1.80 16.23

7/25/12-12/31/13 -1.20 -2.53 -0.89 0.37 0.72 7.63 10.02 -0.84 28.011/30/15-6/10/15 -2.44 -2.91 -0.87 -3.86 0.05 3.19 2.37 -2.06 5.002/11/16-3/11/16 -0.45 -1.42 -0.29 0.75 -0.22 -0.56 7.04 -0.75 9.48

7/5/16-3/13/17 -3.21 -4.86 -2.24 -2.10 -0.28 6.60 8.73 -3.62 14.58

9/7/17-12/31/17 -0.39 -1.18 -0.29 0.69 -0.45 1.58 1.13 -0.04 9.10

Average -1.41 -2.29 -0.78 -1.38 1.38 6.51 8.86 -0.63 13.88

Median -1.48 -2.59 -0.32 -1.53 0.49 4.14 5.75 -0.75 11.83Minimum -7.21 -4.86 -13.82 -12.38 -1.53 -0.56 1.13 -15.17 1.62MAXIMUM 5.79 2.90 5.31 17.27 7.21 33.46 58.47 13.84 35.68

So why should investors consider remaining faithful to fi xed income as rates rise? Over time, as bonds mature and if they are reinvested at higher interest rates, their ability to generate income can increase. Moreover, the bonds’ interest payments could also be reinvested at higher rates. Because of this, if rates rise steadily and modestly over time, investors may be better off than if rates had remained at previously low levels.

FIGURE 2 shows just how quickly bonds have recovered from the short-term price hit infl icted by a rise in interest rates. In 19 out of 19 periods, the year that followed a period of rising rates brought improved returns for the Bloomberg Barclays

US Aggregate Bond Index, with returns between less than 1% and 35%, and an average return of more than 9.5%. So if investors were able to deal with the short-term hit to their fi xed-income holdings, they saw their returns recover in a short period of time.

Playing the what-have-you-done-for-me-lately game with bonds can be a shortsighted proposition. When taken with the changeability of global economic conditions and market movements, it becomes clear that taking a long-term view to your fi xed-income investments (and remembering their role in your portfolio) is a good way to maintain perspective in the face of short-term pressures.

Data Sources: Morningstar, Ned Davis Research, 1/18

Past performance is not indicative of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. Please see back page for index defi nitions. For illustrative purposes only.

Love The One You’re (Investing) With

FIGURE 2: Bonds Have Tended to Recover Strongly After Rate IncreasesFixed-Income Returns During the Year After Rising-Rate Periods (%)

3

Period

Bloomberg Barclays

US Aggregate Bond Index

Bloomberg Barclays

US Treasury Index

Bloomberg Barclays US MBS

Index

Bloomberg Barclays US

Corporate Investment Grade

Bond Index

Bloomberg Barclays US 1-3

Year Government/Credit Bond Index

Credit Suisse

Leveraged Loan Index

Bloomberg Barclays US

Corporate High-Yield Bond Index

Bloomberg Barclays

Municipal Bond Index

S&P 500

Index

2/26/80-2/26/81 5.95 7.43 5.53 4.57 9.36 N/A N/A -7.54 19.43

9/30/81-9/30/82 35.04 31.07 47.76 38.32 25.31 N/A N/A 36.15 4.49

5/30/84-5/30/85 19.86 18.58 21.66 22.60 15.53 N/A 17.43 15.83 17.61

10/16/87-10/16/88 13.23 11.98 14.58 14.95 8.79 N/A 12.06 12.91 -11.08

11/7/94-11/7/95 17.12 15.34 14.58 20.52 8.92 9.00 15.65 14.81 30.157/5/96-7/5/97 9.29 8.27 9.89 10.30 6.93 8.23 13.86 8.24 39.061/20/00-1/20/01 13.34 14.38 13.00 11.77 10.37 4.92 -2.67 13.70 -6.694/1/02-4/1/03 11.65 13.85 8.63 13.33 7.16 1.99 4.58 9.71 -23.806/14/04-6/14/05 6.99 7.10 6.77 7.91 2.32 4.89 11.22 8.51 7.876/12/07-6/12/08 6.66 9.41 6.93 3.47 6.38 -3.22 -0.68 4.02 -9.356/13/08-6/13/09 5.65 6.63 9.78 2.43 5.05 -11.12 -3.87 2.72 -27.404/5/10-4/5/11 5.50 4.93 4.64 8.10 2.19 8.17 14.68 1.58 15.362/8/11-2/8/12 9.32 10.68 7.56 11.15 2.06 1.85 6.09 14.29 4.5610/27/11-10/27/12 5.42 3.57 3.79 10.68 1.24 10.68 14.76 8.98 16.153/19/12-3/19/13 4.03 3.43 2.05 7.92 1.19 8.10 12.83 5.62 12.7712/31/13-12/31/14 5.84 4.92 6.03 7.29 0.76 2.60 2.50 9.03 14.116/10/15-6/10/16 5.49 5.72 4.18 7.10 1.44 0.58 1.26 7.19 2.993/11/16-3/11/17 0.53 -1.57 -0.33 4.40 0.92 12.52 16.99 -0.26 21.777/13/17-12/31/17 1.18 0.50 0.98 2.38 0.00 2.24 2.41 1.80 10.43

Average 9.58 9.28 9.89 11.01 6.10 4.09 8.18 8.80 7.29

Median 6.66 7.43 6.93 8.10 5.05 4.89 11.22 8.51 10.43

Minimum 0.53 -1.57 -0.33 2.38 0.00 -11.12 -3.87 -7.54 -27.40

MAXIMUM 35.04 31.07 47.76 38.32 25.31 12.52 17.43 36.15 39.06

4

Investors looking to dump their fi xed-income investments as rates rise may want to take a step back to avoid missing the forest for the trees. It’s important to remember that the short-term challenge of an interest-rate increase generally doesn’t supersede the long-term reasons for holding bonds in your portfolio.

One of those reasons is to serve as a potential counterbalance against volatility in the equity markets. Investors who maintain an allocation to fi xed income can help off set declines in their equity holdings. And if you think diversifi cation isn’t a compelling enough reason to consider owning an asset class, talk with investors who were “all in” on equities in 2008 and discovered they were walking a high wire without a net as the winds of volatility started to gust. FIGURE 3 shows that during the seven negative calendar years for stocks that have occured since 1977, bonds have enjoyed positive returns.

The other main reason to consider including fi xed income in your portfolio is as a source of potential income. As mentioned earlier, bonds with varying levels of interest-rate sensitivity and credit risk have historically performed diff erently as rates rise. While the income-generating ability of traditional bonds can be compromised in the short term, other types of bonds may retain their income-generating abilities and may help off set short-term price declines.

This Too Shall Pass…

-40%

-30%

-20%

-10%

0%

10%

20%

30%

1977 1981 1990 2000 2001 2002 2008

-40%

-30%

-20%

-10%

0%

10%

20%

30%

1977 1981 1990 1994 1999 2000 2001 2002 2008

Source: Thomson Reuters, 12/16

Past performance is not indicative of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. please see back page for index defi nitions. For illustrative purposes only.

� Stocks: S&P 500 Index � Bonds: Bloomberg Barclays US Aggregate Bond Index

FIGURE 3: Bonds Have Historically Had Positive Returns When Stocks Have Been Down

5

...But the Utility of Fixed Income Should EndureFor example, high-yield bonds have historically tended to fare well during periods of rising rates. As FIGURE 1 shows, the Bloomberg Barclays US Corporate High Yield Bond Index posted positive returns during rising-rate periods, averaging a return of 8.86% while the Bloomberg Barclays US Aggregate Bond Index was almost entirely in the red with an average return of -1.41%. High-yield bonds generally have a higher credit risk, because of their lower credit rating than traditional bonds. But their interest-rate sensitivity can be lower because they typically off er higher yields than many other types of bonds.

Bank loans have also tended to perform well when rates rise. They have a fl oating coupon that can adjust up or down on a monthly or quarterly basis as interest rates move up or down, which helps them generally have low interest-rate risk,

though they are still subject to credit rate and liquidity risk.

If you’re still concerned about rising rates, there are short-duration bonds which tend to be less volatile because a rise in interest rates impacts the value of a two-year bond far less than that of a 20-year bond.

Traditionally known for their tax advantages, municipal bonds have played an important role in helping investors diversify across many macroeconomic environments, including periods of rising rates. FIGURE 4 shows how municipal bonds have historically provided positive returns during periods of rising rates over more than 20 years.

FIGURE 4: During Interest-Rate Hiking Cycles, Municipal Bonds Delivered Positive ReturnsAnnualized Average Monthly Return ( January 1994 - December 2017)

Source: Morningstar, Federal Reserve, 1/18. Based on the returns for the Bloomberg Barclays Municipal Bond Index.

Interest rate-hiking cycles were measured by Fed tightening cycles. The four tightening cycles since 1994 were: February 1994-March 1995, June 1999-May 2000, June 2004-July 2006, December 2015 to December 2017. Past performance is not indicative of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. Please see back page for index defi nitions. For illustrative purposes only.

Hiking cyclemonths

Non-hiking cycle months

All months

2.54%

5.04%5.96%

6

Investment Implications:

Keep the following in mind as we make our way through a period of expected interest-rate increases:

Though they tend to lower bond prices in the short term, interest-rate hikes have generally led to higher fi xed-income returns down the road for investors who have stayed the course.

Regardless of rate increases, fi xed income should remain a consideration in investor portfolios to help act as a bulwark against equity volatility.

High-yield bonds and bank-loan exposure may be viable portfolio options for the income-seeking investor during periods of rising rates.

The fi xed-income markets can be complicated, and your fi nancial advisor can help you choose among the wide range of options that are appropriate for you based on the interest-rate environment, how much risk you’re comfortable taking, and your investment goals.

7

All investments are subject to risk, including the possible loss of principal. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened because interest rates are at, or near, historical lows. High-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. Diversification does ensure a profit or protect against a loss in a declining market. U.S. Treasuries are secured by the full faith and credit of the U.S. Government and offer a fixed rate of return. Bank loans can be difficult to value and highly illiquid; they are subject to credit risk and risks of bankruptcy and insolvency.1 The Bloomberg Barclays US Aggregate Bond Index is composed

of securities from the Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.

2 The Bloomberg Barclays US Treasury Index is an unmanaged index of prices of US Treasury bonds with maturities of one to 30 years.

3 The Bloomberg Barclays US MBS Fixed Rate Index measures the performance of investment grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

4 The Bloomberg Barclays US Corporate Investment Grade Bond Index covers all publicly issued, fixed rate, nonconvertible, investment grade debt.

5 The Bloomberg Barclays US 1-3 Year Government/Credit Bond Index is an unmanaged index comprised of the U.S. Government/Credit component of the U.S. Aggregate Index.

6 The Credit Suisse Leveraged Loan Index is designed to mirror the investible universe of the United States dollar-denominated leveraged loan market.

7 The Bloomberg Barclays US Corporate High-Yield Bond Index is an unmanaged broad-based market-value-weighted index that tracks the total return performance of non-investment grade, fixed-rate, publicly placed, dollar denominated and nonconvertible debt registered with the Securities and Exchange Commission.

8 The S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

9 The Bloomberg Barclays Municipal Bond Index is an unmanaged index of municipal bonds with maturities greater than two years.

Hartford Funds Distributors, LLC (HFD), Member FINRAWP361_0318 205656

hartfordfunds.com 888-843-7824 @hartfordfunds hartfordfunds.com/linkedin