Treasury Market Absorbs Fed Increase

In our recent paper “Short-Term Rates on the Rise,” we discussed the increase in short-term interest rates that has been underway since 2013. We also posed a complex question: Has the market been leading the Fed to increase interest rates, or has the Fed been leading the market by setting expectations for the purpose of not surprising market participants?

Although we still do not know the answer, both scenarios may have led us to the same outcome experienced on December 16—a market that was unsurprised and able to digest, without a catastrophic loss, the first increase in the federal funds target rate since 2006. In fact, yields on US Treasuries ended the day relatively unchanged from the previous trading period and in some cases below their highs for the year.

The 6-Month US Treasury bill yield ended 3 basis points1 (bps) lower, the 1-Year US Treasury note 1 bps higher, and the 2-Year US Treasury note 4 bps higher.

The market’s ability to reflect the probability of different outcomes and events in security prices reinforces the greater importance of focusing on asset allocation and diversification as opposed to parsing information from “news” in an attempt to forecast future market activity.

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