The Set Up In Bonds As The FOMC Considers A Second Rate Increase By Urban Carmel
* December 14, 2016
Summary: Bond yields usually rise as the FOMC raises rates. This is one of the mostly strongly held consensus views in the market right now. A year ago, investors also thought yields were set to rise; instead they fell over the next half year. Might investors be wrong now once again?
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The FOMC will likely raise the target for the federal funds rates later today. We discussed the affect of rate increases on various asset classes a year ago when the FOMC enacted their first rate increase since 2006. The general conclusion was that equities, commodities and bond yields all rose in the subsequent months. That post is here.
Those conclusions were mostly right. The one exception was bond yields. On the day of the rate increase in December 2015, 10 year yields in the US hit 2.33% (arrow). That was the high until November 2016, 11 months later. In the interim, yields fell 100 basis points over the next half year.
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