Why Treasury Yields Can Fall After an Expected Rate Hike

Summary

The document explains how Treasury yields can decline even when the Federal Reserve raises its policy rate. Bond prices and yields often move in opposite directions, which can make a rate increase seem inconsistent with a decline in yields if investors focus only on the current policy decision.

The example distinguishes an expected action from new information about the future path of rates. The hike was anticipated, while accompanying guidance indicated that later increases would be gradual. Investors consequently revised down their expectations for future federal funds rates, and Treasury yields fell. The central lesson is that markets react to policy news relative to prior expectations, including forward guidance, rather than mechanically to the direction of the current rate change. This is a concise explanation of one episode, not a general forecast rule; yields can respond to many factors, and the document provides no broader data or analysis.

Key ideas

• Treasury yields can decline after a policy rate increase if the increase was already expected.
• Forward guidance can change market expectations for the future path of short-term rates.
• Yields respond to new information relative to what markets previously anticipated.
• The example illustrates one episode and does not establish a universal direction for yields after rate decisions.

Tags

# Relationship between hike in interest rate and drop in treasuries yields


# Relationship between hike in interest rate and drop in treasuries yields












How does a hike in interest rate results in drop in yields of treasuries?

My understanding was that when interest rate rises, investors would sell-off bonds, which would result in increase in yields.

## Answer by dm63 (score 2, accepted)

https://quant.stackexchange.com/a/33054

What happened was that the Fed indeed hiked by 25bp (as expected) but also conveyed the message that future hikes would be quite gradual (this was not expected). The market therefore altered its expected path of Fed funds downwards and hence the yield of Treasuties downwards. It's all about what happened versus previous expectations.

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.