Long-Term Rates Down Since June

February 7, 2005 06:47 AM

Long-Term Rates Down Since June

Excerpt: As the Federal Reserve has steadily pushed up short-term interest rates, the market has been pushing long-term interest rates down.

As the Federal Reserve has steadily pushed up short-term interest rates, the market has been pushing long-term interest rates down.
The Fed has been on a rate-raising campaign for nearly eight months, delivering six increases for a total rise of 1.5 percentage points that culminated with Wednesday's 1/4-point hike.

What has caught many off-guard is that long-term rates have fallen a half percentage point. The rate on the 10-year bond ended at 4.17% Thursday. It was 4.71% just before the Fed's first rate increase. "This is very unusual," says Allen Sinai, economist at Decision Economic.

It's staggering because long-term rates, determined by traders making bets about the future, usually rise when short-term rates go up. During the previous three Fed tightening cycles, the 10-year yield rose an average of 71 basis points.

So why are long-term rates acting so strangely? Theories include:

• Modest economic expectations and low inflation. The Fed raises short-term rates to keep the economy cool and inflation in check. Bond investors don't see any big changes ahead, Pimco Managing Director Paul McCulley says. And investors are confident the Fed will do whatever is needed to contain inflation at about 2% excluding food and energy, Nuveen investment officer Tom Spalding says. Fear of inflation is what would make the bond market push up long-term interest rates.

• The "transparency" of the Fed. The Fed has been broadcasting its plans, giving investors time to react more accurately ahead of time, says Bill Larkin, at Cabot Money Management. Because investors knew what was coming, they moved early, McCulley says. In fact, the 10-year yield soared a full percentage point the three months before the Fed started boosting.

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Read all 55 posts in the same category of Economy:

Greenspan Again Backs Plan for Private Accounts - Aug 22, 2006
Oil Prices Rise Amid Concern Over Weather and Supplies - Aug 17, 2006
Prices Rise Only Slightly, Easing Fears About Inflation - Aug 14, 2006
Oil Climbs Above $51 a Barrel on Concerns About Supplies - Aug 08, 2006
Greenspan Says Entitlement Programs Need Reform - Feb 18, 2005
U.S. Trade Deficit Exceeds a Record $600 Billion - Feb 13, 2005
Trim Deficit? Only if Bush Uses Magic - Feb 07, 2005
China: No Yuan Timetable - Feb 06, 2005
Greenspan Says Trade Gap May Narrow - Feb 06, 2005
Greenspan Sees U.S. Trade Gap Stabilizing and Possibly Falling - Feb 06, 2005
If Yuan Moves, Will U.S. Rates Go Up? - Feb 04, 2005
Greenspan Sees Weak Dollar Easing Current-Account Gap - Feb 04, 2005
Economy Slowed in 4th Quarter, U.S. Report Says - Jan 31, 2005
Economy Slowed in 4th Quarter, U.S. Report Says - Jan 31, 2005
Federal Reserve Is Expected to Continue Raising Rates - Jan 31, 2005
Deficits May Be Wearing Thin at the Fed - Jan 25, 2005
U.S. Faces More Tensions Abroad as Dollar Slides - Jan 25, 2005
Oil Price Impact: Worse Than Feared? - Jan 23, 2005
The Effect of Rising Rates - Jan 17, 2005
A Chinese Revaluation May Not Help U.S. - Jan 15, 2005
For Unemployed, Wait for New Work Grows Longer - Jan 09, 2005
Behind the Bouncing Ball of Oil Prices - Jan 09, 2005
Jobs Picture Shows Some Signs of Life - Jan 08, 2005
Faster Rate Increases Coming? - Jan 04, 2005
Fed Minutes: Inflation Subdued, But... - Jan 04, 2005
China Pledges To Work On Yuan Reform - Jan 04, 2005
Fed Intends to Persist With Rate Increases - Jan 04, 2005
U.S. Economy Expected To Perform Well in 2005 - Jan 03, 2005
Women Are Gaining Ground on the Wage Front - Jan 01, 2005
Bush Vows To Maintain 'Strong' Dollar - Dec 26, 2004
Dollar Hits New Low Versus Euro - Dec 23, 2004
Leave No Truffle Behind? - Dec 23, 2004
Social Security Tax Limit May Go Up - Dec 20, 2004
U.S. Quiet on China Trade Tax - Dec 17, 2004
Fed Raises Interest Rates for 5th Time This Year - Dec 17, 2004
OPEC Considers Output Cut to Keep Prices From Falling - Dec 09, 2004
A Plan For U.S. Energy Security? - Dec 08, 2004
Fed Heading For A Pause - Dec 07, 2004
Social Security Reform = New Debt - Dec 06, 2004
Fed Sees Growth, Measured Rate Hikes - Dec 05, 2004
Weak Employment Rport Casts Doubts Over US Economic Strength - Dec 05, 2004
Fed: Inflation Not Setting Off Alarms - Dec 05, 2004
Balancing Act On The Buck - Dec 04, 2004
Job Growth Is Well Below Wall Street Forecasts - Dec 03, 2004
Fed Reports Growth In 11 Of 12 Regions - Dec 02, 2004
Inflation Under Control, Fed Gov. Says - Dec 02, 2004
Global Forecasts for 2005 Growth Are Reduced - Nov 30, 2004
Borrowing For Social Security Plan? - Nov 28, 2004
No Longer Top Dollar? - Nov 26, 2004
Don't Worry ... Don't Be Happy - Nov 26, 2004
Is Another Recession Brewing? - Nov 25, 2004
Inflation Is Tame, Right? - Nov 24, 2004
The Dollar Is Down, But Should Anyone Care? - Nov 21, 2004
Bush Sets Plans To Revamp Taxes, Social Security - Nov 04, 2004

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