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Why the Fed’s predictable interest rate rises make high-yield bonds and even equities look attractive

Tai Hui says a modest rate increase every quarter should not rattle markets, but it will prompt a look beyond safer fixed-income options

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Federal Reserve chairman Jerome Powell speaks following the Federal Open Market Committee meeting in Washington on March 21. Moves by the Fed and other major central banks to raise interest rates after a long period of keeping them low should not be disruptive to the global economy, Powell said. Photo: AP
Thus far, 2018 is shaping up as a challenging year for investors. By the end of May, global equities delivered zero returns, compared with 10 per cent for the first five months of 2017. The Hang Seng Index was up 2.7 per cent in the year to date. Things are even tougher for fixed income, with US government debt and global corporate credit in negative territory on returns. Emerging market debt started the year well, but a stronger US dollar in recent months has put significant pressure on some markets, such as Argentina, Turkey and Brazil.
Higher interest rates in the US, led by policy changes from the Federal Reserve, are behind this challenging environment. A key question for investors now is: what will the Fed do in the second half of 2018?
A woman walks past an electronic board showing the Hong Kong share index outside a bank in Hong Kong on May 7. Photo: Vincent Yu
A woman walks past an electronic board showing the Hong Kong share index outside a bank in Hong Kong on May 7. Photo: Vincent Yu

A piece of good news is that the Fed policy outlook is boring and predictable. In recent years, the central bank has improved significantly on communicating its policy intentions to minimise volatility.

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