The Fed Is About To Hike: Why That Is Bullish For Bonds

Tyler Durden's picture

With the market pricing in near certainty of a June rate hike despite the Fed's tacit warning that it would like to see evidence the recent economic slowdown is over, a recurring question among trading desks is why aren't long-dated bonds selling off more, or rather why is the 10 and 30Y seemingly bid the closer we get to the next Fed hike with everyone - from hedge funds, to central banks to primary dealers - buying in surprising amounts.

Overnight, an answer came from Wes Goodman, a Bloomberg columnist, who explains that the more the Fed hikes, the more bullish it is for bonds, i.e., the entire market is once again betting on "policy error" by the Fed.

Here is latest Macro View note titled "The Fed Is Going to Hike. That’s Bullish for Bonds"

The Fed’s likely rate hike next month will probably send Treasury yields lower, and investors from hedge funds to banks are loading up on U.S. government debt ahead of the move.


Contrary to conventional wisdom, Treasuries have rallied following the last three rate increases. Instead of sending yields higher, the hikes are driving speculation that rising short-term borrowing costs will curb the economic expansion and make it tougher for the Fed to sustain its 2% inflation target.


Hedge funds and other large speculators boosted their net long position in 10-year futures to the highest level in almost a decade.


U.S. commercial bank holdings of Treasuries and agency debt surged the most in 16 months in the latest weekly data, extending a record high.


Treasuries held by foreign central banks in custody at the Federal Reserve rose this month to the most since June 2016.



Primary dealer holdings of U.S. government securities have surged 50% from this year’s low in March, and they’re now about even with the average over the past 12 months.

Goodman's conclusion: "All this demand may be enough to drive benchmark 10-year yields to a new low for 2017, below 2.16%."

Of course, if this is correct, the implication is that the higher the Fed hikes short-term rates, the lower long-term rates go, flattening the curve and eventually inverting it. And, at some point in the near future, this will once again bring up the even more ominous question: is the Fed once again making a policy error by hiking into an economy that can not sustain it. For now the jury is out.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
lester1's picture

Has the Fed ever hiked going into economic weakness before?

_RRR_'s picture

the FED has a history of fine tuned action for economic strenght or weakness

so why worry?

CJgipper's picture

Btw, 0.25% does not constitute any perceptible "hike".

chubbar's picture

The hedge funds are watching the Pilot (FED) trying to takeoff (GDP growth) by pulling back on the power levers (FED Hikes) and are betting that isn't going to work out well for them. Seems like a reasonable bet. Especially given the various metrics on car sales, commercial loans, etc,. we have been reading about here on ZH.

AUD's picture

why aren't long-dated bonds selling off more?

Simple, the central bank 'cash rate' - in the US called Fed Funds - is the interest rate on overnight borrowing of commercial bank deposits at the central bank. Also known as the interbank rate.

It has no direct influence on long term bond rates.

LawsofPhysics's picture

Yes, but that isn't the problem.

If the central banks do NOT have to put up new collateral to create new money OR face REAL RISK THEN WHAY CAN'T EVERYONE CREATE THEIR OWN "MONEY"!?!?!?!?

FUCK 'EM!!!!   Nothing but OVERCOMPENSATED useless fucking middlemen stuck between the producer and the consumer!!!!!

We all know how such "let the majority eat cake" monetary experiments turn out!!!!  FUCK 'EM, time to execute the middlemen!!!!

squid's picture

The FED doesn't give a shit either way, they have no choice.

As fucked as congress is they will simply not allow negative interest rates and granny jew yellen knows it. So she has to get the FED funds as high as she can before she starts to lower it again due to the crash that will inevitably come. 


This isn't that hard to figure out.




LawsofPhysics's picture

Don't overthink this. The Fed is in fact a criminal organization that continues to facilitate the greatest THEFT/FRAUD in the history of the planet.


"Full Faith and Credit"


tick tock motherfuckers.

Last of the Middle Class's picture

Retail apocalypse, Auto apocalypse, Unemployed snowflake apocalypse. Yup, now is a really good time to rate hike. Head fake!!

lester1's picture

I'm sure PPT will find a way to keep the markets propped up no matter what bad news comes out.


Take notes on the PPT Peter Schiff. We know you are lurking!

NoDebt's picture

"is the Fed once again making a policy error by hiking into an economy that can not sustain it."

Let us pray.  We need a good policy error.  

shizzledizzle's picture

LOL, this shit again? TWENTY FIVE BASIS POINTS!!!! Wake me up when we quit punishing savers.

J J Pettigrew's picture

The arrangement where in a quasi federal agency, charged officially with maintaining stable prices, has a policy which promotes and targets 2% inflation is absurd, ridiculous, and must be challenged.

Add in the damaging and theft condition of keeping rates BELOW the inflation rate.....THEFT and wealth destruction to the benefit of whom?  The largest borrowers.....governments

Horse Pizzle's picture

North Korea will be sudden, brutish, and short. The EU banks don't have a pot to pee in nor a pan to throw it out with.  Bonds reflect flight to safety.

buzzsaw99's picture

Contrary to conventional wisdom, Treasuries have rallied following the last three rate increases...


Magic legs.  [/Forrest Gump]


shizzledizzle's picture

Yellen said they'd take me anywhere!

stitch-rock's picture

Lets see them actually hike a real move like 300 basis points.
Something that doesn't scream: we're weak fools but
we're arrogant and entitled sociopaths.

These pussies "say" their system is working ok....

syzygysus's picture

Puhlease, puhlease hike to 3%.


ahahahhahahaah, yeah, .25% coming, just so they have some wiggle room to slash...but it won't be enough.

chubbar's picture

These fuckers (FED) are watching the market yawn when they hike by 25 basis points but think the market is going to applaud when they cut it back down again? How fucking stupid are these people.

They are never going to be able to get to a meaningful rate such that cutting it would be, well, meaningful. I suspect we are very close to watching the FED decide how they want to die, fire (inflation) or ice (deflation). They've been able to avoid that decision to date, walking down a blade getting thinner and thinner but we are nearing the end. The next FED debacle will be their last, imo. They can cut rates and flood the market with money thus sealing their doom OR they can let the defaults start cascading along with the bank failures, thus sealing their doom. That appears to be the state of affairs but maybe they have a couple of tricks we haven't seen yet that will delay the inevitable? I hope it's not war.

moman's picture

Yup, hike the rates.....that should help the housing market and store closings.

Cordeezy's picture

The fed will hike, strange that dollar is weak and gold if down today.

Dilluminati's picture

For all the variable rate loans out there, the raise in prime wikll subtract that many ccorresponding dollars from conusmers.  The funniest part is the ARM tied to condos where the owner cannot refinance due to owner occupancy levels, these rate increases should cause identical comps to collapse as absentee owners walk.  I see no evidence in wage growth and think the Fed is pushing the string and anyone who is paying attention is buying these positions.  I hope they do raise and I'll jump into a bump CD or grab the 10 year again to fill out a ladder.

khakuda's picture

Congress should reign in the Fed since they were never chartered to have a 2% inflation mandate.  Actually, it was quite the opposite, in that they are supposed to have stable purchasing power.  They continue to violate their mandate.

RocketScience's picture

The Fed was politcized long ago. They are raising interest rates to crash the economy for the 2018 elections. They should be audited. Janet Yellen should be investigated.

JailBanksters's picture

Is a hike really 1 tenth of 1 percent ?

A Hike is where your paying +30% Interest on a credit card where the money is just created out of thin air.

Bam_Man's picture

The kike will hike.

Davidduke2000's picture

for each full point the central bank raises in 2017 I would cut an inch of my dick.