Preparing Bond Portfolio for Fed Interest Rate Hike

It appears, after years of speculation, that the Federal Reserve is about to raise the Federal Funds Rate. Short term Treasury yields are at their highest levels in years, anticipating this inevitable rate hike. Short-term yields can spike even higher as speculation drives up their price.

Are you ready for this? What can you do?

The bonds likely to see the greatest volatility during this transition are those with medium-term maturities. Why?

Short terms bets have been constantly in play in anticipation of the Fed’s initial move. On the other hand, long-term rates tend to be stable, as time is needed to suss out trends.

It’s the “jittery middle” – where trends are being predicted, trend lines forming, ¬†and consequences of bad decisions are looming larger as the market adjusts to the new reality of interest rates rising – where wisdom – nowadays better known a “better predictive analytics” – is required.

One well know strategy for confronting uncertain interest rates is to employ a “ladder strategy” where investing in financial instruments such as CDs and bonds with different length mid-term maturities can act as a hedge against uncertainty.

What adds further uncertainty – and possibly an investment opportunity – is the current divergence in interest rate moves by central banks across the globe.

Talk to your investment advisor regarding buying or selling government bonds at this time. As is often the case, the smart money (institutional, etc) has likely already placed their bets, but just because one moves first doesn’t guarantee a favorable outcome. Be careful that your decision doesn’t fuel the first movers unwise choice, by affording them a profitable outcome as they head for the exits and you buy in. Do your research. See the big picture. Don’t do what I’ve done too often: invest emotionally or with a shallow understanding.

Talk to your bond investment advisor and ask not only for reports and analysis that speak to current concerns but also for historical data.