U.S. bonds rallied late this week after the expected Fed increase of .25% on short term overnight lending rates. It is important to make the distinction between short-term and longer-term interest rates. While the Fed can control short-term interest rates and to a much lesser extent, longer term interest rates, the ultimate driver of longer term interest rates is the market and the expectations on inflation, employment and economic growth. With inflation non-existent and an anemic world economy barely in recovery, we are not surprised to see interest yields decline in the face of this Fed rate hike. The smart money was well aware of the high probability of this rate hike and adjusted to it well before the normal citizen.
The stock market is having another volatile week which benefits the safe haven of the bond markets. With monetary policy so complicated given the various opaque stimulus initiatives having been constructed by the U.S., European, Japanese and Chinese policymakers, we continue to be biased toward locking in loan programs when the rates look attractive.