Mark Preskett: The decision by the FOMC to raise the Federal funds rate by 25 basis points ends a seven-year period of 0% interest rates. The reaction in the markets has been positive suggesting that the rise had already been priced in and judging by the futures market prior to the announcement it was highly likely the Federal Reserve was going to move.
Equity markets were up on the announcement and it is particularly noticeable that the U.S. Treasury yields have declined marginally in the immediate aftermath and the dollar weakened. In itself a 25 basis point move is not a seismic shift but it does mark the start of a change in monetary policy cycle and is likely real yields would be rising now for the foreseeable future.
Fixed income investors in particular cannot expect the same level of returns that they have achieved over the past decade. The market will now focus on the pace of future increases and the word gradual was used several times by the Fed Chair Janet Yellen yesterday.
Our view is that gradual increases in the Federal funds rate can be absorbed by fixed income assets and where returns from the asset class will be more muted, we believe it is still right to hold bonds as a part of a diversified portfolio.
