On December 14th the Federal Open Market Committee (FOMC) increased the target federal funds rate by 25bps. The move was widely expected but, remarkably, was only the second raise of the target rate in over a decade.
In her press conference following the meeting, FOMC Chair Janet Yellen pledged that rate increases would likely be “gradual,” but the surprise to financial markets came in the Committee’s formal statement. While noting that inflation expectations had picked up “considerably” and upgrading their outlook for GDP in coming years, the FOMC also signaled a slightly steeper rate path for the next three years than that which had been falling steadily over the past several meetings. According to Federated Investors, it was widely anticipated the Fed would not give much guidance on rate trajectory until more information was available on the actual implementation of numerous pro-growth policies being touted by the incoming Trump administration. Before the FOMC meeting, markets anticipated one to two possible “data dependent” rate increases during the coming year. Presently, that expectation has been raised to three.
Yields on U.S. Treasuries have been rising fairly steadily since early July with the yield on the benchmark ten-year Treasury almost doubling from 1.35% in July to 2.60% as of the time of this writing. The weakness in bond portfolio prices since the November presidential election, however, have been the most pronounced since the May of 2013 “taper tantrum” when the Fed signaled the end of its $70 billion monthly bond buying program following the financial crisis.
A rate move of this magnitude is certainly exacerbated by the extremely low yield starting point, and unrealized losses in market value eventually diminish when assets are held to maturity. More importantly, the “silver lining” lies in the markedly higher rates that will be available for current liquidity, upcoming maturities and new money. Although the interest rate outlook is less than certain long term, we are very excited by the prospects of eventually replacing the anemic cash flows available to us these past several years with more healthy and robust rates as time passes.
We appreciate your continued confidence and hope you will contact us with any questions you may have regarding your portfolio(s) or the fixed income markets in general.
Not Investment Advice or an Offer
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.