Fed Chairman Ben Bernanke’s at war with the bond market, and himself.
Yesterday’s 25-basis-point hike in the Fed funds rate was the 15th in a row for the central bank, and the first for Bernanke, who took over from his predecessor, Alan Greenspan, on January 31. Judging by the FOMC statement that accompanied Tuesday’s rate hike, more rate hikes may be coming: “The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”
Traders in the Fed funds futures market responded immediately, repricing the May contract a bit in anticipation of another 25-basis-point hike, which would bring Fed funds to 5.0% when the FOMC meets next on May 10.
Traders in the bond market followed suit, selling the 10-year Treasury with a vengeance, and thereby boosting the yield yesterday to around 4.78%, or up by nearly 8 basis points over Monday’s close. In fact, as we write, the selling continues, pushing the 10-year yield to 4.80%, which is approaching the highest levels in almost two years.