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Short-term interest rates increased during the quarter, as the Fed continued along the gradual path of hiking the Federal Funds rate

Oct 2018

Short-term interest rates increased during the quarter, as the Fed continued along the gradual path of hiking the Federal Funds rate.   We expect one more rate hike from the Fed later this year, and several more next year, to bring short rates close to 3.5%.  Rising rates are a benefit for savers, and we are already seeing higher rates on client money market funds and in other short-term bond funds.   With inflation around 2%, this means the “real return” is also likely to rise, as we expect inflation to remain contained.   We see an increasing probability that longer-term interest rates will also continue to rise.   Following a strong jobs report for the month of September, the yield on the 10 year Treasury note rose to 3.23% – the highest level since May 2011.  As the economy strengthens, interest rates could rise further. As we have noted before, we are limiting overall interest rate risk by focusing on bonds (and bond funds) that mature within five years to take advantage of rising short-term rates.

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