Why are bond prices up right now? And what difference does it make?

By Mitchel Hartman

We’re in the midst of a bond market rally. In the last eight weeks — barring Monday, when the bond market retreated a bit — bond prices have been going up, as their yields — the annual interest rate they pay — have been going down….The Fed’s got interest-rate-setting meetings in July and September. But here’s the thing: It met just last week: At that meeting, “they changed their forecast,” said Joanna Gallegos. “They said for the end of the year, we anticipate only making one rate cut versus three.” Basically, said Karen Petrou, a managing partner at Federal Financial Analytics, the bond market is saying to the Fed: “We can hear you. We’re just not listening.” “Even though [Chair] Jay Powell said, ‘We’re going to keep rates about where they are for a while. We don’t think we’ve beaten inflation yet,’ the market is essentially saying, ‘We think you have, and you’re going to be cutting rates as soon as September,’” Petrou said. Based on that belief, investors bid up bond prices, sending the interest rate on the benchmark 10-year Treasury note lower. “Traders think the Fed is overcautious, and the Fed will be able to cut rates. Indeed, it may have to cut rates because the economy will be softening,” she said. But Petrou pointed out that so far, the Fed has confounded market expectations, keeping rates higher for longer.