St. Louis Federal Reserve President James Bullard created some excitement on Thursday, during an interview which followed his speech before the Council on Foreign Relations. Mr. Bullard remarked that the Federal Reserve could make its first increase to the federal funds rate during the first quarter of 2015.
In light of the Fed’s recent efforts to provide forward guidance, one cannot help but wonder whether this was part of a scripted effort to gradually condition the public – and the markets – for the inevitable demise of the Fed’s zero interest rate policy – often referred to as ZIRP – wherein the federal funds rate was lowered to 0 – 0.25 percent as part of the quantitative easing program.
After all, Mr. Bullard’s remark was not the first hint from a Federal Reserve official that ZIRP would end in 2015. On March 7, New York Fed President William Dudley delivered a speech at Brooklyn College entitled, “The National and Regional Economy”. The financial news media seized on a remark made during the question and answer session at the conclusion of his prepared remarks: Dr. Dudley indicated that the Fed would likely raise the federal funds rate from its current 0 – 0.25 percent range at some point in mid-2015.
Shortly thereafter, during her March 19 press conference, Fed Chair Janet Yellen was asked to specify as to when we could expect the first increase to the federal funds rate. After reminding the audience that there was no set date – due to the dependence of such a decision on the state of the economy – Dr. Yellen explained that the Fed could begin to raise the federal funds rate from its current 0 – 0.25 percent range approximately 6 months after the Fed’s bond-buying program ends in the fall.
Again on June 24, after a speech in Puerto Rico, William Dudley answered a question by stating that he believed that it was “reasonable” for market expectations to focus on an anticipated interest rate hike in mid-2015.
Investors need to be mindful of the fact that the Fed will be raising the federal funds rate because the economy is strengthening. As the nation’s economy strengthens, bond prices go down (and yields go up). The negative impact on bond prices will be taking place at the very time when the Fed will be deliberately raising interest rates. Beyond that, once the economy actually becomes robust, the Fed will be on the lookout to keep inflation under control. The Fed’s means for doing that is by raising interest rates.
People with investments in bond funds will see their balances fall as yields increase. Long-term bonds, such as the 30-year, are harder-hit by rising current interest rates. Because long-term bonds are more at risk for losing value than shorter-term Treasury notes, investors who prefer bonds may consider changing their investments from long-term bond funds to shorter-term funds.
Another way to seek profits from rising interest rates is to select ETFs that are designed to rise in value as bond prices fall. Accordingly, one of the following ETFs could offer opportunities to benefit from rising interest rates:
ProShares UltraShort 20+ Year Treasury ETF (TBT) – This ETF Is designed to obtain daily investment results that are two times the inverse (-2x) of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
ProShares Short 20+ Year Treasury Bond ETF (TBF) – This ETF is designed to obtain investment results which correspond to the inverse (-1x) of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
Direxion Daily 20+ Treasury Bear 3x Shares ETF (TMV) – This ETF is designed to obtain daily investment results of 300% of the inverse of the performance of the NYSE 20 Year+ Treasury Bond Index.