Eli5: Why have bond yields gone down the last few months while the fed has raised rates?

Question

Eli5: Why have bond yields gone down the last few months while the fed has raised rates?

In: 3

Answer 1

The fed provides a couple of pieces of guidance.
The fed funds rate (rate you can borrow money from the fed at) and forward guidance (fed thinks rates will be higher/lower in the future).

The bond market trades.based.on fed.guidance. Bonds get bought / sold and the price they sell at determines their yield. Think about it this way: a bond will pay a fixed amount (say $100) in 10 years. If you buy it for $80, and you’ll get paid $100 in 10 years time, you can calculate a yield or effective interest rate.

If people that own bonds decide to sell, they may depress the price to get enough buyers. Depressing the price will raise the interest rate. Since the bond market acts on any information, when the fed says interest rates will rise, the market will front run the fed and sell.bomds, causing the price to drop and interest rates to rise faster than the fed funds rate.

The market overreacted to the number of fed rate hikes and is currently trying to get to the terminal (maximum fed funds rate). If you think bond yields are too high, the price.of bonds has to rise for yields to fall.

So people are buying bonds thinking they are priced too low and there will be capital appreciation through bond pricing as yields fall.