Managing Market Risk in a Retirement Portfolio

Michael is a portfolio manager at a mid-sized investment firm. He is currently managing a diversified portfolio for a client nearing retirement, and the client has expressed concern about the potential impact of rising interest rates on the fixed-income portion of their portfolio. The firm has historically maintained a strategic allocation that includes a significant weighting in both corporate bonds and government securities.

Michael is exploring strategies to mitigate interest rate risk while balancing the need for income generation. He is considering reallocating some of the portfolio to include floating-rate bonds and Treasury Inflation-Protected Securities (TIPS) to provide a hedge against rising rates. Additionally, he is assessing the potential for using interest rate derivatives, such as interest rate swaps, to manage the exposure.

Discuss how Michael can effectively manage market risk in this scenario. In your response, outline potential strategies while considering the client's investment objectives and the overall implications for the portfolio's risk profile.