How Bonds Have Performed After the Fed Stopped Raising Rates
The Federal Reserve (Fed) is the central bank of the United States. It influences the economy by setting the federal funds rate, which is the interest rate that banks charge each other for overnight loans. The Fed raises or lowers the federal funds rate to achieve its goals of price stability and maximum employment.
The federal funds rate affects other interest rates in the economy, such as the yields on Treasury bonds. Treasury bonds are debt securities issued by the U.S. government to finance its spending. They have different maturities, ranging from a few months to 30 years. The yield is the annual return that an investor receives for holding a bond until maturity.
When the Fed raises the federal funds rate, it usually causes the yields on Treasury bonds to rise as well. This is because investors demand higher returns to lend money to the government when they can get higher returns elsewhere. Conversely, when the Fed lowers the federal funds rate, it usually causes the yields on Treasury bonds to fall as well.
The Fed has been raising the federal funds rate since March 2022, from near zero to about 5.25%-5.5% today. However, it has signaled that it may be close to the end of its tightening cycle, as inflation pressures have eased and economic growth has slowed.
What does this mean for bond investors? How have bonds performed after the Fed stopped raising rates in the past?
According to a study by PGIM Investments, bonds have delivered positive returns 100% of the time in the subsequent six-month, one-, three- and five-year periods following the last hike for the previous seven Fed tightening periods since 1962.
What about the duration of the bonds? Historically, high quality long term bonds have outperformed high quality short term debt and cash instruments during periods when the Fed was lowering rates or holding them steady. However, this is not a guarantee of future performance, and there may be periods when short term bonds perform better than long term bonds. A study from Blackrock looking at the past 30+ years shows that during periods when the Fed was holding steady or lowering rates high quality long term bonds returned 6.1% while high quality short-term debt returned only 4%.
However, it’s important to note that bond investors should hold a diversified portfolio of bonds with different maturities and durations after the Fed stops raising rates. This is because other factors can affect bond performance, such as credit quality, inflation, and taxes. By holding a diversified portfolio, you can help mitigate the risks associated with investing in bonds.
At LaCour Wealth Management, we specialize in providing second opinions to clients who already have a financial advisor. We can help you evaluate your current portfolio and provide our honest feedback and recommendations. We understand that investing can be a daunting task, but we’re here to help. Our team of experts can guide you through the process and help you make informed decisions about your investments.
This blog post was created with the help of Bing Chat Enterprise, an AI-powered chatbot developed by Microsoft. Raymond James is not affiliated with and does not endorse the opinions or services of Bing Chat Enterprise or Microsoft.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of LaCour Wealth Management and not necessarily those of Raymond James.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
