[Originally published on SeekingAlpha]
The Federal Reserve has been hinting at an increase in short-term interest rates some time in 2015 for much of the past year. Now that QE has ended, everyone is talking about when the Fed will raise rates. The Eurodollar futures have priced in a rate hike by September 2015. The Fed central tendency shows a similar path. What does this mean for an investor's fixed income exposure? Should she sell bonds to reduce interest rate exposure and put the money into cash, or stocks, or something else? We want to analyze how past Fed tightening cycles have played out for US Treasury bonds to help determine how we should be positioned for 2015. This will inform our decision about how much interest rate exposure we hold in fixed income ETFs like iShares 20+ Year Treasury Bond ETF (TLT), Vanguard Long-Term Corporate Bond ETF (VCLT) and iShares 7-10 Year Treasury Bond ETF (IEF).
We begin by looking at interest rate data from the past 40 years, highlighting the periods where the Fed was raising the effective Federal Fund rate. The data comes from the FRED database hosted by the Federal Reserve Bank of St. Louis. Our dashboard at the St. Louis Fed website shows which data series we use. For the period where 30-year Treasurys were not being issued (March 2002 - Jan 2006), we fill in the data with the CBOE 30-Year Treasury Yield Index from Yahoo Finance.
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