By Tom Burnett CFA
In response to inflation (40- year high in the U.S.) and an aggressive Federal Reserve policy change, interest rates have begun to move higher. On March 16, 2022, the Fed announced its first increase in the Fed Funds rate since 2018. The 25 basis point increase is clearly the first of many similar Fed decisions this year. The impact of the aggressive Fed policy changes is reflected in the rate movements of the closely followed 10- year and 30- year Treasury securities. For example, the rate ( yield to maturity) on the 10- year Treasury bond is now 2.24%, up from 1.51% at the end of 2021. Similarly, the yield on the 30- year Treasury bond is now 2.49%, well above its level of 1.91% at year end 2021. As expected, the yield curve has flattened from 40 basis points at year end, to 25 basis points currently.
In line with rising rates, bond markets have declined in price and performance so far this year. The Index of 20+-year Treasury bonds is down 10.0% ( WSJ.com for March 21, 2022) in 2022. The Index for International Bonds is also down this year—5.4% through March 18.
Investors must learn to navigate this new interest rate environment in contrast to the historically low rates of the past four years. One fact is clear— the Fed is serious and investors will have to adjust to and live with this higher rates element as they make their investment decisions.
Tom Burnett CFA is Director of Research