Chart 2: Impact of recent hiking cycles
|Start date||End date||10yr UST yield (D, bps)||2s10s UST (D, bps)|
|04 Feb 94||01 Feb 95||+179||-118|
|30 Jun 99||16 May 00||+64||-72|
|30 Jun 04||29 Jun 06||+61||-189|
What does it mean for investors?
Of the last three hiking cycles the current situation appears most similar to 2004-06; once again rates are starting from a low base, with the pace of hikes likely to be much slower than in the mid-1990s. However, key uncertainties remain.
At more than six years the current recovery is already longer than some post-war expansions, while there is little sign of a dangerous build-up of inflationary pressure. On this view the cycle may struggle to get very far before being halted or reversed.
However, the market is already pricing a more dovish path for interest rates than the projections published by the Fed. Given long-term inflation expectations are already low by historical standards, a rebound in commodity prices or pick-up in wage growth could cause a sharp rise in yields.
Whatever scenario eventually materialises, there is clearly the potential for fixed income returns to vary markedly across the curve. With this in mind, investors would do well to consider low-cost ETFs to flexibly manage their fixed income exposure as the cycle progresses.