The latest upward revision in second quarter GDP growth tips the balance even more toward a hike in the Federal Funds rate sooner than later. While there’s some debate whether the Federal Reserve starts its march toward rate normalization in the first or second quarter of 2015, the time to adapt your fixed income portfolio is now. As Anthony Valeri, Investment Strategist at LPL Financial recently pointed out, the bond market has a habit of sending yields up about four to six months ahead of the first Fed Funds hike.
Some history in a few charts, starting with the 1994 rate hike. Coming out of the early 1990s recession the Federal Reserve pushed its Federal Funds rate to around 3% where it stayed through 1993.
In early 1994 the Federal Reserve began to ratchet up the Federal Funds rate, but as seen in this chart, the 10-year Treasury had already had a move up of more than 50 basis points before the Federal Reserve kicked into tightening mode. (more)
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