As the magazine goes to print, the markets await news from the Federal Open Market Committee. Many fund managers, Fed watchers and economists are expecting a rate hike, the first since June 2006, given that we’ve experienced “the longest stretch in history that the so-called Fed policy rate has gone without a change,” according to Eric Jacobson of Morningstar.
While it is hard to predict how the markets will react if a rate hike in December is followed by more hikes over the coming months (and years), there is some history to review, Jacobson says. The Fed rate hikes that began in early 1994, for instance, included seven hikes of different amounts that brought the target Fed-funds rate up by a total of 300 basis points in 12 months.
Though there were some “outlier” portfolios that got hit by huge losses, the intermediate-term government-bond Morningstar category did not experience such trauma. In fact, four of the five Morningstar Medalists in the category, Jacobson points out, even performed better than the average.
“There was short-term pain over the period of the Fed’s hikes, but it didn’t take long for investors to recoup those losses. And, if anything, that helps support the notion that quick, sharp, short-term rate hikes, in and of themselves, aren’t necessarily the disaster for longer-maturity bonds that they might appear to be,” explained the senior analyst, who covers active strategies for Morningstar’s manager research team.
In 1993, the intermediate-term bond category had some $39 billion in assets. It now has over $1 trillion. The intermediate-term government group, though, remains limited — at roughly one-tenth that size.