Positioning Portfolios After Fed Interest Rates Liftoff by Gene Tannuzzo, Columbia Threadneedle Investments

  • With a positive backdrop for credit risk, we favor investment-grade corporate bonds and MBS, while some areas of high yield also present opportunities.
  • We believe a modest but positive duration stance remains appropriate, with 2016 likely to provide additional opportunities to buy longer dated bonds.
  • Currency risk presents some opportunity, but it is no longer as simple as expecting the U.S. dollar to appreciate versus all other currencies.
  • Inflation risk will likely increase next year as commodity prices ultimately bottom and wages perk up. At current prices, increasing exposure to inflation-protected bonds makes sense to us.

The Federal Reserve ceremoniously raised short-term interest rates on December 16 for the first time in over nine years. The move was generally well received in financial markets and was reinforced by an almost uncharacteristically upbeat tone from Fed Chair Janet Yellen in her subsequent press conference. Despite modest upward pressure to government bond yields, equity and credit markets performed strongly, and currency swings were fairly modest overall. For us, this move confirms two important elements. First, the Fed hiked for the right reasons. Labor markets have continued to improve, and the outlook for consumption remains firm. Second, the move was not a market surprise, something the Fed poured much effort into achieving. In light of these conditions, the overarching conclusion should be that bond investors should stay invested.

Peering into 2016, the Fed’s policy outlook will remain in focus. To that end, we provide our expectation for how investors should position bond portfolios (We Said) given the groundwork laid out by Janet Yellen (She Said).

Fed Interest Rates Liftoff