How to Learn to Love the Fed

If you’re concerned that the Federal Reserve will derail the bond market when it finally starts raising interest rates, the last two tightening cycles suggest those worries may be overblown.

Instead of tumbling, U.S. debt securities from Treasuries to junk bonds gained. They returned an average 5.7 percent between June 2004 and June 2006, when the Fed lifted rates to 5.25 percent from 1 percent. In the seven months ended January 2000, bonds retained their value even as benchmark borrowing costs increased 1.75 percentage points.

With the U.S. economy expanding at a slower pace and less wage growth to pressure inflation, there are fewer reasons for the Fed to raise rates as quickly this time as the central bank moves to end six years of unprecedented stimulus. Long-term bond yields that offer a greater cushion against higher rates than in previous cycles and demand for fixed income from a burgeoning number of retirees also suggest the inevitable selloff forecasters have predicted is less likely to materialize.


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