Must-read investor takeaways as fears of a rate hike loom large
Why the Scottish referendum and Fed news will affect investors (Part 5 of 5)
The consistently strong data has pushed 10-year yields up to 2.6%, the highest level since early July. The move on the short-end of the curve has also been significant. Following the release of a San Francisco Fed note suggesting that investors may be underpricing the potential for an early hike, the yield on the 2-year note approached 0.6%, the highest level since spring 2011. And the rate rises are likely to continue if the Fed statement provides any signs of an early rate hike.
As such, investors may want to familiarize themselves with these ideas for positioning portfolios as rates start to rise.
Market Realist – The graph above shows the U.S. Treasury (TLT) yield curve a week ago and as of September 15, 2014. In response to the largely positive economic data that’s fueling fears of an earlier-than-expected rate hike by the Fed, prices of Treasuries have fallen. The ten-year benchmark U.S. Treasury yield (IEF) posted its highest weekly gain in over a year, as per data from Reuters.
Short-term bond yields (SHY) with a maturity of four years have risen sharply from 0.99% to 1.06%.
Short-term bond prices historically have a tendency to fall as the federal funds rate increases. So it would be advisable to refrain from investing in short-term bonds with maturities between two and five years.
Market Realist – The graph above is from the San Francisco Fed. It shows how the markets are under-weighting the Summary of Economic Predictions (or SEP) by members of the Federal Open Market Committee (or FOMC).
Market Realist – The graph above shows how Japanese stocks rose last week while the S&P 500 declined.
As the dollar continues to strengthen with a strengthening U.S. economy—and it’s likely to strengthen further—there’s weakness in currencies of other economies, like Japan. The Japanese equity markets (EWJ) have responded to this weakness. The TOPIX index rose to its highest level in 2014 as the Japanese yen touched its six-year low last week.
Japanese stocks could prove to be a good investment opportunity as the dollar continues to strengthen.
Read our series on A key guide to positioning your portfolio for rising rates to understand how you can safeguard your portfolio when rates are set to rise.
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