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US Market Perspectives

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Roger Bayston: Preparing for When U.S. Fed Raises Rates

Jun 22, 2015

Featuring:  Roger Bayston, SVP, PM, Franklin Templeton Fixed Income Group

  • We have been expecting the U.S. Fed to raise short-term interest rates in 2015.
  • What the Fed is trying to do is communicate that when they start raising rates, it’s going to be gradual and it’s going to be data dependent.
  • Since the financial crisis, the Fed funds market has changed: The Fed has kept the Fed funds rate at 0% for a number of years now, has used the quantitative easing program, and have built a large portfolio of securities, including both Treasury as well as agency mortgage-backed securities.
  • The Fed is not really communicating that it intends on selling its agency mortgage-backed securities position.
  • The real question is not whether the Fed sells the agency mortgage-backed securities into the marketplace, but when will they stop reinvesting principal pay downs which are quite a presence in the market.
  • When the Fed stops reinvesting principal in the marketplace, it will be the first time in a long time that we don’t have some sort of U.S. government agency involved in the agency MBS market.
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Important Legal Information

The information provided is not a complete analysis of every material fact regarding any country, region, or market. Comments, opinions and analyses contained herein are those of the portfolio manager and are for informational purposes only. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of June 22, 2015, and may change without notice. The analysis and opinions expressed herein may differ or be contrary to those expressed by other business areas, portfolio managers or investment management teams at Franklin Templeton Investments. Opinions are intended to provide insight on macroeconomic issues and commentary is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy.

What Are the Risks?

All investments involve risks, including possible loss of principal.  

Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in a fund adjust to a rise in interest rates, the fund’s share price may decline.

Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.

Footnotes

  1. June 16-17, 2015.

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    For US residents only.