Does the Federal Reserve Care about my Fixed Income Portfolio?

Does the Federal Reserve Care about my Fixed Income Portfolio?

It’s fairly reasonable to make assumptions, based on Fed language, that the Federal Reserve are looking to raise interest rates… It appears some time this year. Now, Ms. Yellen has been very political-esq in her choices in language. She doesn’t give any more or less than she needs to in order to say something while saying nothing. Wait, what? Yep – that’s’ right.

So what happens to my fixed income portfolio if the Federal Reserve raises interest rates 1%. JP Morgan has put together a quick chart on this… Bond Impacts with Fed Rate Increase

I won’t bore you with the math (until later). The basic sense is 1% price decline per year of duration. So you can do the rough estimation on your fixed income portfolio. However, you need to keep in mind the volatility, credit risk and place in the market. I would suggest reaching out to your financial advisor professional to see if you’re properly allocated based on your risk level.

yield curve as of 12/31/14JPM also put together this visual of the yield curve at the end of the year. Keep in mind the 30 year U.S. Treasury had the 4th largest bull market run. Interesting factoid.

 

I know you’re really excited about the math. Here you go.. directly from JPM:

Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price *
Convexity * (Change in Interest Rates)^2). *Calculation assumes 2-year Treasury interest rate falls 0.67% to 0.00%, as interest rates can only fall
to 0.00%. Chart is for illustrative purposes only. Past performance is not indicative of future results.




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