Home Guides & Resources chevron_right Economy and the Markets Chart of the Week: How the Bond Market Prices In Fed Policy Published July 29, 2022 Jeffrey DeMasoPortfolio Manager Traders and investors spend a lot of energy trying to predict the Federal Reserve’s actions. The Fed also spends a fair amount of effort telegraphing what it is planning to do; an unwritten policy is to try to avoid “surprising” the market. The result? By the time the Fed acts, bond traders have more often than not already priced in the move. You can see this in the chart below, where I’ve plotted the yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. of the three-month Treasury bill alongside the fed funds rate (specifically, the upper bound of the Fed’s target range). The two rates largely move together—no surprise there. The key insight, though, is that the T-Bill’s yield leads the fed funds rate. So the Fed hiking rates yesterday made headlines, but for bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. investors it was already old news. Note: Chart shows daily yields for three-month Treasury bills alongside the upper bound of the Federal Reserve’s target range of the fed funds rate from 12/31/21 through 7/27/22. Source: The Federal Reserve Bank of St. Louis. This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here. © 2022 Adviser Investments, LLC. All Rights Reserved. Tags: bondsChart of the Weekfederal reserveJeff DeMaso