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What short term investment instruments would be a good option when the Federal Reserve funds rates are anticipated to rise?

My understanding is bonds will decrease in value since the newer bonds with a higher rate would be more valuable, and only if you hold them for a long time or until maturity would you see little negative impact from the increased rates.

Stocks will also suffer as some people will shift investments from stocks to bonds after a federal rate increase.

What types of investments would be unaffected by a Federal Reserve rate increase?

Are there any types of bonds that are general not tied to or influenced by federal rates? I suppose foreign bonds would be minimally affected.

I realize a comprehensive list would be too broad of an answer, but perhaps a few examples or general categories, and why each would be unaffected, would be really helpful in gaining a better understanding of these mechanics.

  • Are you asking about the United States, or some other country with a federal government? Which rate are you referring to? – Chris W. Rea May 4 '15 at 20:41
  • @ChrisW.Rea Good question. I included the tag to reference the proper noun of the Federal Reserve System, which is the central banking system of the United States. – AaronLS May 4 '15 at 20:48
  • @ChrisW.Rea The rate I refer to is the federal funds rate: en.wikipedia.org/wiki/… – AaronLS May 4 '15 at 20:49
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A lot of this depends on the magnitude of the rate hike. But virtually every asset will be affected since this affects the dollar (as a forex trader I admit I may be biased...). The dollar index is up some 20% in the past year in anticipation of this move.

Commodities will be affected as they are all priced in dollars. Stocks will fall for the reasons you mentioned, also, a strong dollar can be bad for exports (Proctor & Gamble recently reported a 30% decline in revenue largely due to the strong dollar, which it estimates will cost it over $1.4 billion) see here

I imagine that car manufacturer equities will be hit hard from a decrease in auto loans which will now have a higher interest rate. Housing prices will fall across the board, instantly.

Of course bonds will sell off, but mostly on the short end of the yield curve. So to answer your question, (and this may be controversial so lets let the voters decide):

I propose that the US investment that will move the least is the 30yr US treasury bond. Yes, bonds in generally will sell off, but a 25 basis point hike is not much for the 30yr. And with all the investors piling into dollars, that money has to go somewhere, and usually it goes into long dated bonds. I think as many or more investors will buy 30yr treasuries as a result of stronger dollar than those who will sell as a result of lower rate.

One note is that the market has largely priced in the rate hike already. Whatever rallies/sell offs occur after the hike will probably reverse slowly in the following weeks. Even a 50 bp hike is relatively modest. The dollar may move higher, but it may be pale in comparison to the move its already made

  • Thanks, I don't quite follow the 30yr bond comments. If I bought a pre-hike 30yr bond, then hike occurs, wouldn't those people buying bonds post-hike value my bond less by the proportion that the rate changed, because it has a lower interest rate than the 30yr bonds they could buy post-hike? I.e. if I my intention was to sell my bond post-hike. – AaronLS May 4 '15 at 21:43

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