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Newsletter January 2017

FIXED INCOME UPDATE - RATES COMMENCE THEIR RISE

The Fed raised short-term rates in December as expected by a quarter point to between 0.5% and 0.75%, the first increase since December 2015. The Fed also announced that it expects to raise rates three times in 2017 contingent on economic growth and inflationary pressures.

Higher oil prices have actually helped the high-yield bond market, since roughly 20% of high-yield bonds are in the oil sensitive energy sector. Rising oil prices have helped stem the risk of default among the sector.

Overall bond prices fell in the last two months of the year, meaning that yields rose. Of the various bond sectors, U.S. Treasury bonds experienced the most significant jump in rates. Rates rose following the election on the premise that growth policies set in motion by the new Trump administration would generate inflationary pressures and economic expansion.

With European and Japanese bond yields still at near zero levels, the heightened yields on U.S. Treasuries has made them that much more alluring for foreign buyers worldwide. As U.S. debt lures in buyers, the yields on U.S. Treasuries is expected to level off as demand and prices return to normalized levels.

The challenge for the Fed going into 2017 is the prospect of increasing economic activity, where higher inflation may need to be harnessed by additional rate hikes. Many believe that it will be more difficult for the Fed to maintain a careful balance.

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Sources: Federal Reserve, U.S. Treasury, Bloomberg, Reuters