When rates are expected to rise, which strategy is recommended?

When interest rates are expected to rise, the recommended strategy focuses on mitigating risk from that anticipated increase. Shorting futures and shorting interest rate options are effective tactics to take advantage of rising rates or to protect a portfolio from potential losses associated with those increases.

By shorting futures contracts that are linked to interest rates, an investor is effectively betting against the movement of fixed income prices, which typically drop as rates rise. This short position gains value as interest rates increase because the price of the futures contract will decline, directly benefiting the investor.

Similarly, shorting interest rate options—specifically, put options—also serves to capitalize on the expectation of rising rates. If rates increase, the underlying bond prices fall, making the puts less valuable or causing the options' premium to decrease, allowing the investor to profit from the position.

In summary, this strategy of shorting futures and options is aligned with the expectation of rising interest rates, helping to hedge against losses in bond portfolios and taking advantage of the market conditions. The other strategies mentioned would typically not align with an expectation of rising rates.