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.
To identify a trend, investment managers typically look at the long end of the curve, and the 30-year bond showed signs of weakness, in spite of Greece’s debt problems.
Whether rising interest rates is indeed a trend should be determined during the week ahead, with new Treasury Inflation-Protected Securities (TIPS) offerings. Up for auction will be:
- $44 billion in two-year Treasuries
- $42 billion in five-year notes
- $32 billion in seven-year notes
- $8 billion in 30-year TIPS
The 30-year TIPS offering is the first offering of that duration since 2001, as some have considered a 30-year maturity as being unnecessarily long. Whether the 30-year TIPS will stimulate investor interest remains to be seen. If the auction is poorly received, higher rates will most likely be on the horizon. Stay tuned.