FED vs the Market
Igor Manukhov - May 05, 2023
Bond market expects the FED to cut rates soon. If that takes place, longer term high quality bonds would outperform.
The bond market tends to be a great leading indicator because bond market participants tent to be more risk averse and therefore more sensitive to any changing conditions. The FED just raised interest rates, however the bond market is not buying it. In fact, the 5 year treasury bond yield has been declining since last October (red line on the top panel).
When I compared past instances of when the bond market disagreed with FED policy (vertical green lines), it appeared that bond market yields tend to go down before the FED starts lowering their rates (pink circles). We will have to see what actually happens, but the historical evidence is pretty compelling as you can see. Now, why should you care about this? For one, if you have funds in variable rate investments (savings accounts, money markets), it might not be a bad idea to buy some fixed rate securities, like GICs and bonds. In a falling rate environment, longer term high quality bonds tend to do well.
