Following the Federal Open Market Committee’s rate hike on Wednesday, long-term treasuries-tracking exchange-traded funds climbed to the top of the heap.
The Federal Open Market Committee raised interest rates on Wednesday by 25 basis points or 0.25% to 1%-1.25%. It was a hawkish hike, but market reaction was rather muted.
That said long-term treasuries-tracking exchange-traded funds were among the best-performers of the day. The Vanguard Extended Duration Treasury (EDV) climbed 2.2%, PIMCO 25+ Year Zero Coupon U.S. Treasury Index (ZROZ) rose 2.1% and the iShares 20+ Year Treasury Bond (TLT) gained 1.5%.
Vanguard chief economist Roger Aliaga-Diaz issued a statement in response:
While the market seems to interpret rate hikes as too hawkish from an inflation perspective, one could make the case they are too dovish given low unemployment rates. Given these diverging forces, we support the Fed’s decision to take a middle path and modestly raise rates at this time.
We don’t anticipate inflation to rise meaningfully from current levels in the second half of the year, and believe the Fed will likely hold off implementation on any additional rate hikes – with a potential long pause through 2018. The Fed will instead focus monetary policy efforts on rolling out the tapering plans announced today – in its continued march towards balance sheet normalization.
Before the Fed’s decision, the probability of a third rate hike this year dropped to around 34%, according to Bloomberg.