Looking at historical patterns, the 10-year treasury rate has stabilized itself at its peak every time. The current federal funds rate has a range of 1.5-%-1.75% with an estimate of an increase by 55 basis points by the end of 2018. There will be no surprise if interest rates are lower than in previous rate-hiking cycles if global rates are also low. Comparing the 10-year treasury yield to the nominal U.S. GDP curve, yields have stayed below the growth curve and will continue to do so because GDP does not seem to grow in the foreseeable future. Not only that, but yield gains in the current cycle are expected to be constrained because the Fed is still holding trillions of dollars in bonds from its quantitative easing efforts. However, recent market data suggests a time of high volatility and incremental rate hikes. Investors should look into redesigning their portfolio keeping in mind the current environment.
Perhaps investors should consider buying in on core bonds as yields rise since it presents an attractive opportunity for portfolio diversification. With the current economy, investors should focus their attention on unconstrained strategies, which can alter bond duration and other market exposures without major constraints. Investing in high quality short-term bonds with yields of 2% or more seems like a great investment opportunity for investors looking to make serious profits while taking on some risk.
On the other hand, if rates start to rise faster than expected, investors should look into moving away from equities and credit risk as they are known to underperform during rate hikes. It is understandable that with the upcoming market movements, short-term returns might spiral downwards, but investors should focus on the long-run diversification strategies for their portfolios. For all one knows, this could be an ideal time for investors to recalibrate their holdings.