Markets are expecting the FOMC to raise the Fed Funds rate one or two more times (25 basis points each) in this cycle. While this is a market estimate and in no way guaranteed, let’s just pretend for a minute that there is a 100% chance of this coming true and the FOMC is going to raise the Fed Funds rate by an additional 50 basis points. If you have money to invest in fixed income, should you hold off on investing until the FOMC acts so that you can purchase bonds at higher yields?
There are a few things to consider when answering this question. First, when the FOMC raises “rates,” they are raising the Fed Funds rate. The Fed Funds rate is an overnight lending rate. This means that the effects of an FOMC move influence the short end of the curve; however, effects may be and often are diminished the farther you extend out on the curve. Many buy-and-hold fixed-income investors purchase intermediate and long-maturity bonds to align with their long-term strategy. This part of the curve and corresponding rates are not necessarily impacted in parallel fashion by Fed hikes. While market volatility can track Fed policy, a rate hike will not always result in intermediate and long-term rate increases.
The chart below highlights previous FOMC rate hikes and compares the movement of Fed Funds versus the 10-year Treasury. Since last September, the Fed Funds rate has been raised by 200 basis points. Over that same timeframe, the 10-year Treasury has essentially gone unchanged. Investors considering waiting to invest in fixed income until the FOMC acts one to two more times should consider the recent trend. Longer-term rates tend to take their direction from longer-term macroeconomic outlooks and trends. So while they can sometimes move in the same direction as short-term yields, they often don’t.
Yields across most sectors of the fixed-income landscape are near their highest levels over the past 10-15 years. Locking in the attractive yields that are currently offered and locking in for longer can benefit investors. Waiting or hoping for yields to inch just a bit higher before investing could backfire should market sentiment, trends, or economic data push rates lower. Take advantage now of the market opportunity to lock in income for longer.