Discussing What The Fed Is Actually Doing When They Raise Interest Rates And How It Affects Bonds
July 26, 2022
Welcome to Wealth Enhancement & Preservation’s Market Minute, where we get to update you on everything that happened in the financial markets this week. My name is Jake Sanders, and I am a partner at Wealth E&P and operate as a Wealth Advisor and Certified Financial Planner.
We’ve been hearing a lot in the news lately, in fact, we’ve been hearing quite a bit throughout this entire year. We’ve been especially hearing buzz about interest rates and interest rate hikes. The Fed is going to meet next week, and they're going to inevitably raise rates, but it's just a matter of how much; could it be 75 basis points or perhaps as high as 1%?
Now, is this going to be bad for your bond portfolio? You've heard it said, and it is true, that when interest rates go up, bond prices go down. This is not going to be good, but we need to define what the Fed is actually doing when they raise rates. What they're raising rates on is actually the federal funds rate, which is the rate that banks charge each other to loan money overnight; in other words, it's a very short-term rate.
Now your longer-term instruments, your 10, 20, and 30-year bonds, may not be impacted. In fact, as you can see in this chart above, comparing the 10-year treasury with the fed funds target rate, there have been several periods where those two are moving inversely. In other words, the fed funds rate may go up, but longer-term bond instrument yields may go down.
Is this going to impact your bonds? Well, it's probably not going to be good, but it may not be bad. As always, we're monitoring very closely here at Wealth E&P. If you have any questions about any of this, we would love to hear from you. If you have any other questions for us about your portfolio, financial situation, or retirement, please feel free to reach out, visit www.wealthep.com, or give us a call at (678)-739-0175. Otherwise, stay tuned for our Market Minute next week! We hope you all have a great week.
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