The U.S. Federal Reserve surprised the market last week by raising the U.S. discount rate by a quarter of a point (0.25%).
Fed Chairman Ben Bernanke insists the rate hike should not be considered to be monetary tightening, but the bond market doesn’t answer to the Fed Chairman and recognizes that the interest-rate cycle has reached the point where tightening has begun.
There are other signs that a trend of interest rates moving higher has begun.
Generally, when the stock market sells off, the bond market moves in the opposite direction. When news about Greece’s debt problems hit the market and stock prices declined, typically we would have seen a significant flight to safety, resulting in a significant rally in the bond market. We saw some shifting of assets to safer investments, but the shift quickly faded.