Why Long-Term Bond Yields Can Fall After a Fed Rate Hike

Summary

The document explains why longer-term Treasury yields can decline even when the Federal Reserve raises its overnight policy rate. It distinguishes the federal funds rate, which applies to overnight lending, from yields on longer-maturity government debt. These rates can move in different directions because they reflect different time horizons and expectations.

The answer offers two possible explanations: investors may expect economic weakness and future rate cuts, or the hike may be smaller than markets anticipated. The cited example reports falling yields across several Treasury maturities after a rate increase, illustrating that the policy move alone does not determine market yields. The discussion is brief and gives possible explanations rather than testing which one drove the observed move. It also does not work through bond pricing or yield calculations; its main lesson is to distinguish current policy rates from market expectations about future rates.

Key ideas

• The federal funds rate is an overnight rate, while Treasury yields reflect borrowing over longer periods.
• Long-term yields can fall after a policy rate increase if investors anticipate weaker growth and later rate cuts.
• Market reactions depend partly on how the policy decision compares with expectations.
• A single rate hike does not imply that yields across maturities will rise.

Tags

# Interest rate vs bond yield


# Interest rate vs bond yield












In this Investopedia article,

> For example, when the Federal Reserve increased interest rates in March 2017 by a quarter percentage point, the bond market fell. The yield on 30-year Treasury bonds dropped to 3.108% from 3.2%, the yield on ten-year Treasury notes fell to 2.509% from 2.575%, and the two-year notes' yield fell from 1.401% to 1.312%.

I know that interest rate and bond price are negatively correlated: if interest rate goes up, bond prices drops. Also, for a given amount of coupon earned on each period, if the price drops, the yield should increase instead of falling. What is wrong here? Thanks.

## Answer by dm63 (score 4, accepted)

https://quant.stackexchange.com/a/36152

The Federal Funds rate is an overnight rate. It may move differently from longer term rates such as the yield on 10yr notes. Possible reasons why 10yr yields might move down when the Fed raises the Fed funds rate : (A) the market thinks that the economy will go into recession so the Fed will have to lower rates down the road. (B) the Fed had been expected to raise the Fed funds rate by 50bp but they only raised it by 25bp. Etc.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.