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Fed Rate Hike Renews Bond-Market Volatility 

Franck Dixmier 

 

Franck Dixmier

12/15/2016 

By announcing a new rise in interest rates, and hinting at more to come, FOMC members have made a strong statement about their confidence in the US economy. But we expect markets to carefully watch any new data that could change the Fed's mind.
Even though the US Federal Reserve's newly announced 25-basis-point increase in the federal funds rate was widely expected, the biggest surprise came from the "dot plot". This chart, which depicts the expected rate-hike path according to each of the Federal Open Market Committee members, showed a rise of 25 basis points more than anticipated for 2017, as well as three increases in 2018 and three more in 2019. This revision marks the end of a cycle of declining dots, and illustrates the FOMC members' confidence in the state of the American economy.

The US bond market has reacted to the Fed’s move with a bearish flattening of the US yield curve, with shorter maturities being affected by investors who are re-evaluating future rate developments. For its part, the US dollar has strengthened against all currencies.

We expect the environment for US fixed-income securities to be volatile, and we expect markets to react to the publication of any growth or inflation figures that could affect the path of future rate hikes. The upward correction in US Treasuries should not be linear, and the economic stimulus plans of the incoming Trump administration will likely not affect growth or inflation for 12 to 18 months—a significant delay. This backdrop is likely to make the Fed more data-dependent than ever.


The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.



Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, us.allianzgi.com, 1-800-926-4456.

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