Fed likely to raise funds rate in September

The US Federal Reserve is likely to raise the Federal funds rate by 0.25 per cent at its September meeting, according to BondAdviser.

The research firm explained that given recent movements in the US 10-year bond rate, which climbed from 1.52 per cent to 1.73 per cent in the week ending 15 September, it is “not unreasonable” to think a 0.25 per cent hike has already been priced in to the market.

“If this turns out to be the case, then Australian bond investors should not be overly fearful of future US interest rate increases as most core Australian fixed-income funds are benchmarked against the Bloomberg AusBond Composite +0 Years Index,” the firm said.

The Bloomberg index’s yield to maturity of 2.1 per cent and average duration profile of 5 years mean interest rates would need to rise a full 1 per cent within a period of 12 months for the index to decline “by approximately 3 per cent”, BondAdviser said.

“Overall, we anticipate that the Federal Reserve will begin tightening monetary policy again soon, although we generally expect rates to rise progressively.

“This gradual process should ultimately allow investor expectations to shift and as a result we expect bond market volatility to remain limited relative to equity markets,” the research firm said.

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Francesca Krakue

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