How Fed Rate Rise Will Affect Bonds

The Federal Reserve has raised interest rates by 0.25% to a target range of between 0.25% and 0.5%. What will this mean for markets - and your investments?

Mark Preskett 17 December, 2015 | 2:04PM
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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.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Mark Preskett  is a Senior Investment Consultant & Portfolio Manager for Morningstar UK