Why are bonds falling when fed is expected to cut rates?

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bpr
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Why are bonds falling when fed is expected to cut rates?

Post by bpr » Fri Sep 13, 2019 10:59 am

Trying to understand whats is happening with bonds.

MotoTrojan
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Re: Why are bonds falling when fed is expected to cut rates?

Post by MotoTrojan » Fri Sep 13, 2019 11:00 am

The fed doesn't have any direct impact on bond yields. Also the fed is/was expected to cut, so yields already reflected that info before they started to go. The yields are a reflection on the expected trends of shorter term bonds (including the ultra-short borrowing rates the fed does control) over the longer term periods they cover.

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nisiprius
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Re: Why are bonds falling when fed is expected to cut rates?

Post by nisiprius » Fri Sep 13, 2019 11:16 am

Trying to understand the day-to-day mood swings of Mr. Market--Mr. Stock Market or Mr. Bond Market, either one--is a fool's errand. Maybe it's a simple as "nobody knows nothing" (which John C. Bogle said was the best investment advice he ever got). Maybe it is "those who are talking don't know and those who know aren't talking." At the most rational, movements don't reflect the current situation, they reflect changes in investors' expectations for the future.

Nassim Nicholas Taleb and Jeremy Siegel have independently given examples of the folly of looking for explanations for short-term price movements.

In 'The Black Swan', Nassim Nicholas Taleb wrote:
One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: U.S. Treasuries Rise; Hussein Capture May Not Curb Terrorism. ... Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price (they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: Saddam's capture (the same Saddam). At 13:31 they issued the next bulletin: U.S. Treasuries Fall; Hussein Capture Boosts Allure of Risky Assets. So it was the same capture (the cause) explaining one event and its exact opposite.
In 'Stocks for the Long Run,' Jeremy Siegel wrote:
On November 15, 1991, when the Dow fell more than 120 points, or nearly 4 percent, Investor's Business Daily ran an article about the market entitled "Dow Plunges 120 in a Scary Stock Sell-Off: Biotechs, Programs, Expiration and Congress Get the Blame." In contrast, the London-based Financial Times published a front-page article by a New York writer entitled "Wall Street Drops 120 Points on Concern at Russian Moves." What is interesting is that such news, specifically that Russian government had suspended oil licenses and taken over the gold supplies, was not mentioned even once in the Investor's Business Daily article!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by livesoft » Fri Sep 13, 2019 11:19 am

Bonds are falling because the expectations that rates will be cut have changed. Indeed, the very fact that bond fund prices are lowered demonstrates this fact. Just because someone tweets that rates should be cut doesn't mean that will happen. Furthermore, maybe the FFR will change to be lower, but the change will not be as much as some folks used to think.

Something to watch: https://www.cmegroup.com/trading/intere ... -fomc.html during the next week.

OTOH, if you believe bond fund prices will go up to where they were last week, then this is an outstanding time to do some market timing.
Last edited by livesoft on Fri Sep 13, 2019 11:22 am, edited 1 time in total.
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nedsaid
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Re: Why are bonds falling when fed is expected to cut rates?

Post by nedsaid » Fri Sep 13, 2019 11:22 am

If I had to venture a wild guess, it would be that the bond market is now less worried about trade policy and recession.

Nisiprius is right, hard to know exactly why the markets do what they do, at least in the short term. There are literally billions of dollars, if not trillions, that can move with the click of a mouse.
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Svensk Anga
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Re: Why are bonds falling when fed is expected to cut rates?

Post by Svensk Anga » Fri Sep 13, 2019 11:36 am

My guess is that the bond market is starting to worry that rate cuts might spur some inflation. Longer bonds which the Fed can only marginally influence but not control are seeing yield increases/price declines. The CPI report yesterday revealed 2.4% year over year inflation in the core measure (less food and energy). Wage growth is starting to pick up.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Lee_WSP » Fri Sep 13, 2019 11:54 am

Because less people want to buy bonds and thus there is less demand and probably extra supply since more people are wanting to move back into equities.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by YRT70 » Fri Sep 13, 2019 12:18 pm

bpr wrote:
Fri Sep 13, 2019 10:59 am
Trying to understand whats is happening with bonds.
I asked the same question a few days ago: viewtopic.php?f=22&t=290241

NotTooDeepLearning
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Re: Why are bonds falling when fed is expected to cut rates?

Post by NotTooDeepLearning » Fri Sep 13, 2019 12:40 pm

My thesis:

The natural yield for (long term treasury) bonds is the long run economic growth rate + inflation. We should also note that bonds aren't declining in a vacuum. They spent the last month or two skyrocketing (yields plummeting). IMO this is because growth expectations declined dramatically. Growth slowed across the globe in recent months, particularly in manufacturing. See: https://economics.td.com/global-chill-slow-us-manu Bonds rallied even further after the trade war was escalated in dramatic fashion in early August and the yield curve (10 year minus 2 year) inverted, signaling a possible recession.

Now, after that dramatic climb, bond prices are simply declining back down closer to where they were at the beginning of the year. The first decline was because the trade war was seemingly de-escalated, generally improving the outlook for a deal and reducing the chance of a recession. Today's major decline was because retail sales, the primary pillar of the entire U.S. economy, came out strong and can possibly carry the U.S. through a global slowdown and help us avoid a recession. We also saw some decent action from the ECB which may help spur growth in Europe.

In short: August saw a spike in bond prices because of the trade war escalation, a global slowdown, and yield curve induced recession fears. September is seeing a decline in bond prices because of the trade war de-escalation, strong retail sales, and the natural subsiding of unreasonable fears.

Also, the fed only controls the fed funds rate, which may, at best, slightly influence longer term bond prices. The fed does not control interest rates in general. Here's a good explanation of the relationship: http://aswathdamodaran.blogspot.com/sea ... rest+rates

Disclaimer: Everything I said may be a grotesque oversimplification of the world and could be entirely inaccurate. Causality is hard to pinpoint and all the above factors are interacting in a complex environment.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by shans2000 » Fri Sep 13, 2019 6:34 pm

Svensk Anga wrote:
Fri Sep 13, 2019 11:36 am
The CPI report yesterday revealed 2.4% year over year inflation in the core measure (less food and energy).
I think this is the reason for the recent sell-off, stronger than expected inflation readings.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Phineas J. Whoopee » Fri Sep 13, 2019 6:56 pm

Because the Fed does not control bond yields. It has influence, but not control, and the further in the future the maturity of the bonds the less influence. Bond yields are set by an ongoing, continuous auction among fixed income market participants, who know at least as much as you and I about future expectations and already take them into account.

The main policy rate the Fed sets is the Federal Funds Rate, FFR. It applies to banks lending between themselves overnight, which includes over-weekend.

Some people, especially including the financial press and they know or should know better, greatly overstate how much influence the Fed has.

PJW

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Tyler Aspect » Fri Sep 13, 2019 7:11 pm

I don't know. Maybe TLT want to go tilting?
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rascott
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Re: Why are bonds falling when fed is expected to cut rates?

Post by rascott » Fri Sep 13, 2019 8:39 pm

A lot of folks unwinding the long bond trade right now.... basically the feel this week was that the recession talk was overblown, as there were some fairly decent economic results. Truce in the trade war, etc...


Bonds ran up too fast... maybe too far, maybe not... but definitely too fast. There was a very large amount of outflows from bond funds this week. Most inflows to equities in 18 months. Then within equities you have a shuffle out of growth/momentum and into value/ cyclicals Which typically happens when the economy is expected to strengthen.

Next week could flip it all again... keep in mind it was just last week everyone was convinced we were headed to zero/ negative rates.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by stlutz » Fri Sep 13, 2019 8:42 pm

Because Britain crashing out of the EU isn't happening anytime soon, if ever.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Tdubs » Fri Sep 13, 2019 8:45 pm

I'd been planning on fixing a neglected part of my portfolio--LT treasuries. This week seems like a decent one to do it.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by willthrill81 » Fri Sep 13, 2019 9:35 pm

I find it interesting that many believe markets to be 'efficient' (i.e. quickly incorporating all available information) when we occasionally (often?) see markets moving in seemingly irrational ways in the apparent absence of information. Perhaps the best example of this was the stock market crash in October of 1987.
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Re: Why are bonds falling when fed is expected to cut rates?

Post by aristotelian » Fri Sep 13, 2019 9:38 pm

One could just as easily ask why yields cratered to near historical lows at a time when the economy is strong and stocks are close to highs.

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Phineas J. Whoopee » Fri Sep 13, 2019 9:44 pm

willthrill81 wrote:
Fri Sep 13, 2019 9:35 pm
I find it interesting that many believe markets to be 'efficient' (i.e. quickly incorporating all available information) when we occasionally (often?) see markets moving in seemingly irrational ways in the apparent absence of information.
You claiming institutional investors which comprise the great majority of trading volume pay no attention to all the information they pay so much to access? All the inside information (EMH strong form) they probably can illegally get? They don't know what the futures market predicts? They don't participate in the futures market?

What do you think? Market efficiency means perfect pricing with which you personally agree?

It doesn't mean that.

PJW

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Re: Why are bonds falling when fed is expected to cut rates?

Post by willthrill81 » Fri Sep 13, 2019 9:50 pm

Phineas J. Whoopee wrote:
Fri Sep 13, 2019 9:44 pm
willthrill81 wrote:
Fri Sep 13, 2019 9:35 pm
I find it interesting that many believe markets to be 'efficient' (i.e. quickly incorporating all available information) when we occasionally (often?) see markets moving in seemingly irrational ways in the apparent absence of information.
You claiming institutional investors which comprise the great majority of trading volume pay no attention to all the information they pay so much to access? All the inside information (EMH strong form) they probably can illegally get? They don't know what the futures market predicts? They don't participate in the futures market?

What do you think? Market efficiency means perfect pricing with which you personally agree?

It doesn't mean that.

PJW
I'm not claiming anything. I said that I find it "interesting." And I also used words like "seeming" and "apparent."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why are bonds falling when fed is expected to cut rates?

Post by abuss368 » Fri Sep 13, 2019 10:07 pm

bpr wrote:
Fri Sep 13, 2019 10:59 am
Trying to understand whats is happening with bonds.
The Federal Reserve does not control bond rates, however they do impact short term rates. The market ultimately sets rates.
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Re: Why are bonds falling when fed is expected to cut rates?

Post by abuss368 » Fri Sep 13, 2019 10:09 pm

Phineas J. Whoopee wrote:
Fri Sep 13, 2019 6:56 pm
Because the Fed does not control bond yields. It has influence, but not control, and the further in the future the maturity of the bonds the less influence. Bond yields are set by an ongoing, continuous auction among fixed income market participants, who know at least as much as you and I about future expectations and already take them into account.

The main policy rate the Fed sets is the Federal Funds Rate, FFR. It applies to banks lending between themselves overnight, which includes over-weekend.

Some people, especially including the financial press and they know or should know better, greatly overstate how much influence the Fed has.

PJW
Nice post and well said.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Phineas J. Whoopee » Sat Sep 14, 2019 4:19 pm

willthrill81 wrote:
Fri Sep 13, 2019 9:50 pm
Phineas J. Whoopee wrote:
Fri Sep 13, 2019 9:44 pm
willthrill81 wrote:
Fri Sep 13, 2019 9:35 pm
I find it interesting that many believe markets to be 'efficient' (i.e. quickly incorporating all available information) when we occasionally (often?) see markets moving in seemingly irrational ways in the apparent absence of information.
You claiming institutional investors which comprise the great majority of trading volume pay no attention to all the information they pay so much to access? All the inside information (EMH strong form) they probably can illegally get? They don't know what the futures market predicts? They don't participate in the futures market?

What do you think? Market efficiency means perfect pricing with which you personally agree?

It doesn't mean that.

PJW
I'm not claiming anything. I said that I find it "interesting." And I also used words like "seeming" and "apparent."
Great.

Would you care to express and support a specific position among your thousands of posts? [OT comment removed by admin LadyGeek]

PJW

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Re: Why are bonds falling when fed is expected to cut rates?

Post by willthrill81 » Sat Sep 14, 2019 4:26 pm

Phineas J. Whoopee wrote:
Sat Sep 14, 2019 4:19 pm
willthrill81 wrote:
Fri Sep 13, 2019 9:50 pm
Phineas J. Whoopee wrote:
Fri Sep 13, 2019 9:44 pm
willthrill81 wrote:
Fri Sep 13, 2019 9:35 pm
I find it interesting that many believe markets to be 'efficient' (i.e. quickly incorporating all available information) when we occasionally (often?) see markets moving in seemingly irrational ways in the apparent absence of information.
You claiming institutional investors which comprise the great majority of trading volume pay no attention to all the information they pay so much to access? All the inside information (EMH strong form) they probably can illegally get? They don't know what the futures market predicts? They don't participate in the futures market?

What do you think? Market efficiency means perfect pricing with which you personally agree?

It doesn't mean that.

PJW
I'm not claiming anything. I said that I find it "interesting." And I also used words like "seeming" and "apparent."
Great.

Would you care to express and support a specific position among your thousands of posts?
I believe the adaptive market hypothesis to better account for market behavior, though I don't wish to debate the merits of the hypothesis beyond what has been done in other threads already.

However, I don't believe that adherence to any overarching theory of market behavior is necessary for one to be a successful investor.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why are bonds falling when fed is expected to cut rates?

Post by abuss368 » Sat Sep 14, 2019 4:32 pm

aristotelian wrote:
Fri Sep 13, 2019 9:38 pm
One could just as easily ask why yields cratered to near historical lows at a time when the economy is strong and stocks are close to highs.
That has been the mystery!
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Why are bonds falling when fed is expected to cut rates?

Post by Northern Flicker » Sat Sep 14, 2019 5:00 pm

bpr wrote:
Fri Sep 13, 2019 10:59 am
Trying to understand whats is happening with bonds.
Any answers you get will have a high level of speculation to them, but it appears to me that the bond market believes a trade war will slow economic growth so that bond prices have been volatile recently, and changing with changes to perceived risk of a prolonged trade war. Again this is my speculation.
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