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How Will Bond Funds React to Rising Rates?

A rundown of possible outcomes for certain Morningstar Categories when the Fed ultimately decides to hike interest rates.

Fixed-income investors continue to fret about the potential timing and magnitude of future rate hikes from the Federal Reserve. Coming into 2015, the general consensus was that the tightening cycle would begin in June, but after a round of economic data that was slightly weaker than anticipated, expectations shifted to a later rate hike. At its meeting last week, the Fed decided to keep rates unchanged, although it signaled a likely hike later in the year.

As my colleague Eric Jacobson noted in his recent article on the potential impact of a Federal Reserve rate hike, it's difficult to predict how the yield curve will move once the Fed acts. That said, we have some ideas about how different Morningstar Categories are likely to react to an increase in interest rates.