What a Fed Rate Hike Would Mean for Investors and Savers

This is different from the Consumer Price Index (CPI) figure that is used as the official inflation rate, which is due on the morning of Sept. 11. But the PPI figure is still high, and it has spooked markets into thinking we are probably getting a rate hike from the Federal Reserve on Sept. 16.

It’s a pretty dramatic reversal from where we were earlier this year, when we were expecting the Fed to cut rates. And that reversal has suddenly made the most boring part of your portfolio — bonds — worth paying attention to.

After the PPI report on Thursday, the 30-year Treasury yield lurched above 5.35%, hitting its highest level in more than two decades. The 10-year yield also hit a multi-decade high above 4.95%.

Long-term bond yields reflect investors’ long-term expectations about inflation and interest rates, and right now, investors are adjusting to the idea that high inflation and high interest rates are here to stay for the time being.

Shorter-term Treasury yields reflect shorter-term expectations, like what the Fed is going to do with benchmark interest rates at its next meeting. After the PPI report, the 3-month, 6-month and 1-year Treasury bills also saw their yields rise, in anticipation of a 25-basis-point hike on the 16th.

You might think that yields will rise further if the Fed does hike benchmark rates — but according to Kody Sherlund, a New York-based certified financial planner, we might actually see the opposite happen with long-term bonds. That’s because the hike is likely priced in now, and a non-hike is now the wildcard scenario.

“In the world of bonds, a hike reinforces the Fed’s credibility on inflation, and could actually help stabilize or ease long-end yields, since it reduces the inflation risk premium investors are demanding. A no-hike scenario, however, could be a little rockier for equity and bond markets if the Fed is perceived as being okay with above-target inflation,” Sherlund said in an email interview.

We saw this dynamic in action back in late July, when the Fed narrowly voted to hold rates steady. Markets didn’t like that — they felt that the Fed was falling behind on tackling inflation, and long-term yields surged.

We might be in for the same “up-is-down” reaction on the 16th — holding rates steady might make yields go up, while raising rates might make yields go down.

A quick Bonds 101 recap: Bonds pay a fixed dollar amount of principal and interest if you hold them to maturity, but their market price fluctuates over time.

When we say that a bond’s yield has risen, we really mean that its market price has fallen, because paying a lower price means earning a higher profit on the payment value of the bond in percentage terms.

That also means that if you buy a bond while yields are high (i.e. prices are low) and hold it to maturity, you lock in that high yield — even if yields fall shortly after.

With that in mind, it might be tempting to take advantage of high yields by investing in bonds right now — especially given that they might actually decline after the expected rate hike. What are the pros and cons of that?

“T-bills provide income that’s exempt from state and local taxes. CDs are taxable at the federal and state level,” Cheng says.

She also notes that T-bills are more liquid than CDs — they don’t have early withdrawal penalties. And although they’re not FDIC-insured like CDs are, they’re backed by the full faith and credit of the U.S. government.

Below is a table of the top-rated brokers reviewed by NerdWallet that offer Treasury bonds, bills and notes.