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Bonds and the Fed: Is the Worst Over?

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Bond yields this year have been in their steepest rise since 1994--the last time the Federal Reserve was pushing its key short-term interest rate up sharply. Indeed, the question now is whether bond yields already reflect the highest the Fed is likely to go with its key rate, now 5.5%. Investors buying two-year Treasury notes today are getting the highest yields in five years. Yields on 30-year Treasury bonds, meanwhile, have already slid from their recent peak of 6.75%. But if the markets are underestimating the Fed--or inflation--today’s yields may look paltry six months from now.

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