Bond Yields Fall to New Low on Dovish Fed

Chart of the U.S. 10-Year Treasury Note Yield - Bond Yields Fall to New Low on Dovish Fed
Chart of the U.S. 10-Year Treasury Note Yield – Bond Yields Fall to New Low on Dovish Fed – Source: and TradingView

As widely expected, the U.S. Federal Reserve kept interest rates on hold at 2.25-2.50% on Wednesday. The Fed also extended the dovish outlook that the central bank has held since the beginning of the year.

Prior to the FOMC announcement, futures markets priced in a full 98.7% likelihood that the Fed would remain on hold. Markets also expected the Fed to indicate no further rate hikes this year.

Well, they got what they were expecting and more. As revealed on Wednesday, the median outlook from FOMC members indeed calls for no rate hikes in 2019. In addition, the Fed indicated that it will end its balance sheet reduction program in September.

Stock Market Reaction

All of this potentially market-boosting dovishness, however, did come with an important caveat. The Fed also lowered economic growth (GDP) expectations.

But despite this worrisome reduction in the growth outlook, stocks surged in the immediate aftermath of the announcement. The S&P 500 turned positive after having traded deep in the red earlier in the day due to comments from President Trump that China tariffs may remain in place for a “substantial period of time.”

By the end of the trading day, though, stocks had pared those Fed-driven gains and closed in the red once again. Leading the drop were bank stocks, which fell on the prospect of an extended period of low interest rates.

Bond Yields Fall to New Low on Dovish Fed

The most notable market move on Wednesday, however, was in bond yields, which fell sharply on the prospects of lower economic growth and no rate hikes this year. The US 10-year Treasury yield extended down to hit a new 14-month low, below the early-January 2019 low of 2.54%. Not since January of last year has this benchmark yield seen such depths.

Since the double-top pattern around 3.25% in October and November of last year, the 10-year yield has seen a sharply declining trend as the Fed has become increasingly dovish. And Wednesday’s FOMC decision was even more dovish than expected, prompting the yield to break down to new lows.

As it currently stands, the chart above shows that the 10-year yield is well below both its 50-day and 200-day moving averages, and the 50-day is far below the 200-day. This suggests a highly “bearish” yield environment that may likely extend, which should help to boost bond prices higher.

IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors. 

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

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