Interest rate-sensitive assets and related exchange traded funds were relatively unfazed by the Federal Reserve’s announced first rate hike since 2006, suggesting that the markets may have already priced in higher rates.
The Federal Open Market Committee announced that it will raise the benchmark interest rate by a quarter of a percentage point to between 0.25% and 0.50%, Reuters reports.
“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2 percent objective,” the Fed said in its policy statement.
Moreover, the Committee stated that the rate hike was the start of a “gradual” tightening cycle and inflation, which remains below its 2% target, will be a key factor in deciding the pace of future hikes.
Meanwhile, assets that are typically sensitive to changes in interest rates were unusually apathetic to the Fed’s announcement.
For instance, the bond-esque dividend-generating utilities sector was the best performing area of the market. Higher interest rates typically make relatively riskier equities less attractive to more conservative fixed-income assets, but the Utilities Select Sector SPDR (NYSEArca: XLU) was up 2.1% late Wednesday. [Don’t Be Afraid of Utilities ETFs]
Rising rates also mean real estate investment trust payments are higher, which eats away at potential dividend payouts to investors. Nevertheless, the broad Vanguard REIT ETF (NYSEArca: VNQ) was 1.2% higher Wednesday. [Residential REITs ETF & The Rise of Renters]
Many investors feared that fixed-income bond funds, especially those with longer durations, would also see prices fall as rates rise. However, long-term Treasury bond ETFs were slightly up Wednesday, with the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) rising 0.4%. [Are You Underestimating Treasury Bond ETFs?]
A Fed rate hike would diminish the supply of money floating around the economy and strengthen the U.S. dollar. However, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, dipped 0.1% after the news.
Additionally, the SPDR Gold Shares (NYSEArca: GLD) increased 1.0% Wedneday. Gold assets would typically weaken on rate hikes since investors would shift away from non-yield-generating assets like gold, especially on a stronger dollar and lower inflation outlook. [Maybe Some Good Technical News for Gold ETFs]
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Max Chen contributed to this article.