Who's Afraid Of The Big Bad Bond Market?
Date
11/4/2024 12:05:08 AM
(MENAFN- Asia Times)
A funny thing happened on the way to lower US interest rates: They went higher instead.
The US federal Reserve lowered its benchmark interest rate by half a percentage point in September, raising expectations that other rates would soon start coming down. Instead, the US Treasury's two-year and 10-year notes and the average 30-year mortgage rate have all risen by half a percentage point or more.
What happened? The short answer is that the Fed doesn't have complete control over interest rates. The bond market, as well, has a lot to say about rates-the longer-term rates in particular, although not exclusively.
The bond market's“say” is a simple reflection of supply and demand. The key is to understand that bond yields and prices move inversely – when one goes up, the other goes down.
The 30-year mortgage interest rate is one of several other bond market-based rates that were coming down before the Federal Reserve slashed its benchmark rate on September 18 but went up after it. Graph: Federal Reserve Bank of St. LouisFor example: If I buy for US$100 a bond that yields 5%, I will receive $5 a year in interest. But let's say I am selling the bond to you and because demand is underwhelming and supply is strong, you pay only $90. You now get $5 a year in interest but because you paid $90, your yield is 5.55%. (If, instead, you had to pay $105 for the bond, your yield would be 4.76%.)
What's happening, then, is that while the Fed is now trying to push rates down, bonds are selling off and that's propelling rates higher. The question is: Why is the bond market bearish?
There are at least two possible answers.
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