The market shifted its view on bonds a few months ago, with the yield on the 10-year Treasury
down 68 basis points from its late October peak.
Historically, however, bonds have done well after the penultimate interest rate hike in a monetary policy tightening cycle by the Federal Reserve.
Steven Major, global head of fixed income research at HSBC, delved into the data.
In eight of the last nine tightening cycles, bond prices — as measured by the Bloomberg U.S. Total Aggregate index — rose after three months.
The trick of course is knowing when that is. Looking at what fed funds futures are pricing, that time could be right now, with expectations the Fed will lift its benchmark interest rate not just on Wednesday but also in March, though analysts are divided on whether the central bank will still be increasing rates later this year.
“The bullish bond market performance of the last few months presumably indicates that quite a few investors believe the peak for rates is close,” said HSBC’s Major. “After the dreadful performance of last year there might also be a view that things cannot get worse.”