Big Bond Selloff Feared, but Markets Yawn in Response to Fed’s Rate Hike

Remember the loud chorus of market forecasters and advisors predicting bond market chaos following the hotly anticipated move by the Fed to boost short-term interest rates?

Perhaps akin to the expected Y2K crisis that wasn’t, the bond market did virtually nothing in the immediate aftermath. In the hours following the Fed’s move to take the federal funds rate a high-percentage-point higher to between 0.25% and 0.5%, the 10-year Treasury note did tick up by two basis points, but actually declined by a basis point from its level just before the 2 p.m. announcement on Dec. 16. Since then, intermediate-term bond rates – which of course are set by the markets rather than the Fed – have declined.

What did I tell my clients leading up to this announcement?  Like the past Fed announcements, I told clients to do nothing.  I stated:

• They should remember this was only the overnight interest rate and nothing more.
• An eventual increase in the federal funds rate was likely already priced into the stock and bond markets. If clients want to invest based on what “experts” say will happen to rates, I caution them about following the herd. That typically doesn’t end very well.

As for stocks, I like to quote Freakonmics co-author Stephen Dubner, who once wrote: “Stocks surge, reasons unknown; may be nothing more than the random fluctuation of a complex system.”

I tell clients that I can’t even explain the short-term past and that markets typically make fools of those thinking they know the future of either stock or bond markets.  We should tell our clients to have the courage to ignore experts and our own instincts and, most importantly, to stick to a long-term plan.

Read more:

• Rate Hike's Got Your Clients Talking? Keep These Points In Mind
• In a Shifting Rate Environment, Advisors Question Bonds
• The Rate Secrets Learned From Examining Bond History