Fed raises rates, bonds and gold rise
Page 1 of 2 12 LastLast
Results 1 to 10 of 12

Thread: Fed raises rates, bonds and gold rise

  1. #1
    Super Moderator
    Join Date
    Nov 2012
    Location
    Pacific
    Posts
    8,036

    Fed raises rates, bonds and gold rise

    Today the Federal Reserve increased their policy rate. I wanted to reiterate something I mentioned earlier, that bonds don't necessarily fall when the central bank raises the interest rate. The market may have already priced in all of this.

    Today, even though the benchmark rate went up, bonds went up as well (i.e. Fed raised rates and bond yields went down). TLT, the 20+ yr treasuries, is up +1.3% Gold is up as well.

    Bond markets are forward looking. It could well be that the Federal Reserve keeps doing small rate increases like this, while bond funds also show good returns.


  2. #2
    Super Moderator
    Join Date
    Nov 2012
    Location
    Pacific
    Posts
    8,036
    Additional comment: the only scenario in which bond funds like VAB/XBB won't do well going forward, is if there are very sharp increases in interest rates.

    By "do well" I mean that I expect VAB will outperform cash & short term bonds over the 10 year time span. Yes, I think VAB will do well even if there are rate increases ahead.

  3. #3
    Senior Member
    Join Date
    Jun 2016
    Posts
    1,783
    Yes, I also noticed it . My US mid term bonds VCIT that I assumed will go down after rate hike, went up 0.8% , US REIT ETF VNQ is up more than 2% - very surprising , Canadian REIT is also a bit up... CDN$ suddenly up more than 1% ....the only logical explanation I have that rate hike was (or will be going forward) less than expected
    Last edited by gibor365; 2017-03-15 at 03:34 PM.

  4. Remove Advertisements
    CanadianMoneyForum.com
    Advertisements
     

  5. #4
    Senior Member none's Avatar
    Join Date
    Jan 2013
    Location
    Victoria
    Posts
    2,995
    Quote Originally Posted by james4beach View Post
    Additional comment: the only scenario in which bond funds like VAB/XBB won't do well going forward, is if there are very sharp increases in interest rates.

    By "do well" I mean that I expect VAB will outperform cash & short term bonds over the 10 year time span. Yes, I think VAB will do well even if there are rate increases ahead.
    I'd say 'unexpected' increase in interest rates.

  6. #5
    Senior Member
    Join Date
    Jun 2009
    Posts
    321
    My stock portfolio went insane today. Up over $7500

  7. #6
    Member
    Join Date
    Dec 2016
    Location
    British Columbia
    Posts
    84
    James,

    I hoped you would comment on that. It know it comes naturally as a follow up to our discussion for USD cash alternatives (SHV/SHY/etc).

    Quote Originally Posted by james4beach View Post
    Today the Federal Reserve increased their policy rate. I wanted to reiterate something I mentioned earlier, that bonds don't necessarily fall when the central bank raises the interest rate. The market may have already priced in all of this.
    You were totally right about this one! Good job.

    Now I read and reread your previous explanations regarding YTM and everything you pointed out, but I admit I still don't fully understand exactly what would determine today's outcome. I do see the drop on March 1 in SHV but it's hard to draw a certain conclusion of the market having already having it priced it in.

    For example what about the coming additional two corrections that the Fed promises further in the year? Why isn't Mr. Market scared of them and sell long/mid-term bonds?

    Today, even though the benchmark rate went up, bonds went up as well (i.e. Fed raised rates and bond yields went down). TLT, the 20+ yr treasuries, is up +1.3% Gold is up as well.

    Bond markets are forward looking. It could well be that the Federal Reserve keeps doing small rate increases like this, while bond funds also show good returns.
    That's exactly what confuses me. I am very new to investing, like I mentioned many times, so I apologize if I am naļve in my understanding so please enlighten me.

    I thought the inverse relationship between a bond's yield and its price is determined mainly by the fact that old bonds come to maturity and new bonds are issues with new yields which are in-tone with the current interest rate set by the central bank. So if I had $1000 USD in cash to invest it is more lucrative for me to buy a new $1000 face value bond yielding 1% today than an old bond from yesterday that yields only 0.75% (same overall maturity in both cases). So if the Feds increased the prime rate today why did the bond yields go down (which in turn causes their price to go up)? Or maybe it turns out that the correlation of the Fed's benchmark rate and the bond yields is not that strong after all? If that's the case then what does the benchmark rate predicate anyway?

    Too many questions I know

    I appreciate your time and knowledge.

    Cheers,
    JC

  8. #7
    Senior Member
    Join Date
    Jan 2016
    Posts
    3,863
    The market was expecting a more hawkish attitude from the Feds. The rate hike was already priced in but the message was more dovish than expected. One day moves like this are not worth commenting on, they are random. The trend hasn't changed.

  9. #8
    Super Moderator
    Join Date
    Nov 2012
    Location
    Pacific
    Posts
    8,036
    The market considers many factors, including what the Fed says about their future actions. I think the bond market was relieved that the Fed is sticking to their mild series of rate hikes.

    http://www.reuters.com/article/us-gl...-idUSKBN16M3C9
    https://www.bloomberg.com/news/artic...rest-rate-hike

    Some traders had anticipated more aggressive Fed rate hikes. This was the reason bonds fell significantly in September - December. Those low bond prices would be justified if the Fed decided to more aggressively raise rates.

    Today we learned that the Fed has no intention to aggressively raise rates, which probably means that some of that Sept-Dec decline was premature and not justified.

    So if the Feds increased the prime rate today why did the bond yields go down (which in turn causes their price to go up)?
    The simple answer to this is that the Fed does not control the bond market, despite what people think. The only thing the Fed directly controls is the extremely short end of the yield curve.

    The main thing I pointed out earlier in my ongoing arguments about why it's fine to hold a bond fund (VAB) is that it's very difficult to speculate on bond direction. You can see that bond prices are moving based on what different institutions and speculators believe may or may not happen. It's not as simple as saying "the central bank is raising rates, therefore bonds will go down" -- these two things are not coupled so directly.

    I have no idea how bonds will play out for the rest of 2017 but I feel fine owning a bond fund.

  10. #9
    Senior Member
    Join Date
    Jun 2015
    Posts
    128
    Quote Originally Posted by mordko View Post
    The market was expecting a more hawkish attitude from the Feds. The rate hike was already priced in but the message was more dovish than expected. One day moves like this are not worth commenting on, they are random. The trend hasn't changed.
    Very well said, agree with your view of today`s market activity 100%

  11. #10
    Senior Member
    Join Date
    Sep 2016
    Posts
    533
    the expected rate hike was a wall of worry


Page 1 of 2 12 LastLast

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •