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Tuesday, 07 February 2023
hawkish Fed speak drives up US bond yields, US Dollar Index soars

hawkish Fed speak drives up US bond yields, US Dollar Index soars

2022-10-29

 

The US presidential election of 2016 was unique in the sense that it featured a candidate who was not just an experienced and proven leader, but also one who was economically conservative in his views. The policies of the current administration have proven to be a double-edged sword. On the one hand, the increasing levels of Federal spending have had negative consequences for the US economy. On the other hand, the Federal Reserve’s policies have been so out of whack and inconsistent with the rest of the economy that this has had a negative impact on the American people as a whole.

Why is the US bond market so fixated on the Fed?

In the months leading up to the 2016 US presidential election, political news of the day focused on whether or not the Fed would raise interest rates. Since it was obvious that the answer was “yes”, the market worried that a higher interest rate environment would lead to an economy that was less flexible, less profitable, and less attractive to investment funds. In early November, when the race was still wide open and the outcome still up for grabs, the yield on the 10-year US bond fell as low as 2.63 percent—all before the November 8th election. Even after the vote, and with the new Trump administration already in place, the yield on the benchmark 10-year US bond was still 2.6 percent.

Why is the US bond market so fixated on the Fed?

The Federal Open Market Committee (FOMC) of the US Federal Reserve System is the primary policy-making body of the United States central bank. The FOMC meets four times a year, and its decisions are not binding for the public or for any private or governmental entity. The FOMC’s policy decisions are made by one of its Federal Open Market Committee (FOMC) members, who “ serves as Chairman of the FOMC. The individual who becomes the Fed Chairman immediately assumes responsibility for managing the Fed’s lending and debt operations, as well as its Open Market Committee activities. The Fed’s Open Market Committee, which was formed in December 2014, holds eight regularly scheduled meetings each year. In addition, the Open Market Committee may call a special meeting to discuss certain monetary policy or financial market developments.

Why is the US bond market so fixated on the Fed?

There are a few theories as to why the bond market is so fixated on the level of the Federal Reserve’s interest rate. The first is that a hike in interest rates would be bad for the overall health of the economy. Higher interest rates mean that consumers and businesses will have to pay more to borrow money, and this could lead to less spending and less economic growth. The second is that a sustained period of low interest rates has been good for bond yields, both for investors and for the US economy as a whole. People who save money today in a high-interest-bearing asset like a savings bond get a higher interest rate in the future when they sell the bond and use the money received to buy a less-risky investment like a share of stock.

Why is the US bond market so fixated on the Fed?

The third is that when the Federal Reserve takes rate changes into account, the rest of the economy is relatively smooth. When interest rates do rise, the impact is relatively gradual, and it is more than compensated for by the increase in other assets like the S&P 500.

Why is the US bond market so fixated on the Fed?

Finally, there is the idea that a higher interest rate environment means more inflation. A higher inflation rate could affect consumer and business spending, as well as ongoing investments like homes and long-term assets.

Why is the US bond market so fixated on the Fed?

The bond market is a very informed group of investors. The interest rate that they’re paying on bonds is a key input into the determination of the price of any security the bond market associates with the term “risk”. Additionally, the market’s expectations of the Federal Reserve’s future monetary policy are another important input.

Why is the US bond market so fixated on the Fed?

The bond market is also remarkably consistent in its approach to determining the value of various assets. This consistency is important because it means that the bond market isn’t likely to be too highly or too lightly influenced by changes in the market environment.

Why is the US bond market so fixated on the Fed?

When the Federal Reserve first starts raising interest rates, the market responds by selling securities, which leads to a drop in asset values and a drop in the price of the S&P 500. Over time, however, the market returns to its normal state, and the S&P 500 is able to recover its initial value.

Why is the US bond market so fixated on the Fed?

 
 

The bond market was once separate from the stock market, and it is still to some extent. Bond investors buy bonds that matures, while stock investors purchase shares of companies that hold bonds.

Why is the US bond market so fixated on the Fed?

The bond market is also heavily influenced by emotions, unlike the stock market, where investors are more likely to look at the long-term. The bond market is also connected to other asset markets through interest rates, which are influenced by the same factors that are causing the rise in the price of other assets.

Why is the US bond market so fixated on the Fed?

People investing in bonds are also concerned about inflation, as well as the possibility of a rate increase and inflation. The bond market is one of the most closely watched investment markets, as it provides information about future cash flow, expected interest rates, and the demand for various assets.

Why is the US bond market so fixated on the Fed?

The bond market is also closely connected to the money market, which has been experiencing significant changes due to the rise in interest rates. The ability of investors to diversify their investment portfolios and reduce their risk is improved by having access to the bond market, which is a critical aspect of investing in bonds.

Why is the US bond market so fixated on the Fed?

Beyond all of this, the bond market is also connected to the stock market, which is another fascinating lightning rod of emotions. The bond market, in contrast, is less connected to the rest of the economy, but it is still a vital part of the financial system.

Why is the US bond market so fixated on the Fed?

With all of these connections, it should come as no surprise that the bond market is closely linked to the Federal Reserve’s decision-making process. When the Fed increases interest rates, bonds fall in price. When the Fed reduces interest rates, bonds rise in price.

Why is the US bond market so fixated on the Fed?

As we’ve discussed, the bond market is connected to other asset markets through interest rates, and when interest rates go up, bonds go down. When the Federal Reserve starts to hike interest rates, investors pull money from the stock market and drop their exposure to bonds. When the Federal Reserve starts to cut interest rates, investors push money into the bond market and increase their investment in bonds.

Why is the US bond market so fixated on the Fed?

Beyond all of this, the bond market is also connected to the stock market, which is another fascinating lightning rod of emotions. The bond market, in contrast, is less connected to the rest of the economy, but it is still a vital part of the financial system.

Why is the US bond market so fixated on the Fed?

Beyond all of this, the bond market is also connected to the money market, which has been experiencing significant changes due to the rise in interest rates. The ability of investors to diversify their investment portfolios and reduce their risk is improved by having access to the bond market, which is a critical aspect of investing in bonds.

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