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Fund Spy: Morningstar Medalist Edition

Will Rising Rates Hobble Highly Rated Core Bond Funds?

History and market expectations argue that fears of their impending doom are greatly exaggerated.


If the Federal Open Market Committee raises the Fed-funds rate when it meets in mid-December 2015, it will be the first time it has done so since June 2006. Investors and pundits have been anticipating--and wringing their hands--about a potential rate hike since the aftermath of the 2008 financial crisis, but it is the longest stretch in history that the so-called Fed policy rate has gone without a change.

There's no way to surely predict what the FOMC will do in December, but futures markets put the probability of a hike at nearly 75% in late November, up from less than 50% a month earlier. Nor can one predict with any certainty how markets will react if a December rate hike is followed by more over the months and years that follow, which appears likely. The latter no doubt worries many investors, along with how core bond funds in their portfolios will react.

Eric Jacobson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.