US rate hikes unlikely to affect long-dated bonds

US rate hikes unlikely to affect long-dated bonds

Long-dated bonds are unlikely to be as badly affected by the likely US rate hikes as many investors expect, according to Jamieson Coote Bonds.


The US Federal Reserve is poised to hike rates at its upcoming Federal Open Markets Committee meeting on 14-15 March, however Jamieson Coote Bonds chief investment officer Charlie Jamieson cautioned that long-dated bonds are unlikely to see a significant sell off.

“Contrary to what popular media commentary would suggest, long-dated bonds are unlikely to move very much at all. In fact, history suggests that long-dated bonds often rally once the central bank actually hikes rates,” he said.

Historic data from the last complete Federal Reserve hiking cycle, which lasted from 2004 till 2006, shows that while rates climbed 4.25 per cent, 10-year US Treasuries saw only a 0.37 per cent increase in yield, Mr Jamieson said, with yields peaking prior to the first hike in 2004 and rallying for the remainder of the year.

“Like the stock market, prices of bond securities move in expectation of future outcomes. History suggests that total return damage to bond portfolios (along with yield sensitive growth assets) largely occurs before the rate rising cycle,” he said.

“Expectation of rate hikes (late in economic cycle) is bad for long-dated bonds, REITs etc at the point where expectations (vs realisation) hits and not the other way around.”

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US rate hikes unlikely to affect long-dated bonds
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