What Happens to Bond Prices as Interest Rates Rise?

What Happens to Bond Prices as Interest Rates Rise?

Trading and Investing

The impact of interest rate hikes on current investments

Introduction:

Recently, market concerns about the economic recession have risen significantly. Many industrial raw material prices have plummeted, and some commodity prices have also been affected. The recent inflation rate is still not optimistic, it seems that the current level of interest rate hikes has not effectively curbed inflation. So, what effect will the Fed’s actions next have on the economy and bond trading?

The Behavior of interest rate:

June CPI increased by 9.1% year-on-year, exceeding market expectations, which put great pressure on the Federal Reserve. The Fed has recently unveiled its firm determination to control inflation and is even willing to accept a higher probability of recession to fight inflation. In the upcoming July meeting on interest rates, the Fed is expected to raise rates by at least 75bp. The Canadian government has taken measures to raise interest rates by 100bps, so it seems that the Fed will not rule out raising interest rates by 100bps.

Impact on bond price and yield:

Graph from: https://fred.stlouisfed.org/

The long-term inflection point of U.S. stocks is often related to 10-year Treasury bonds. Judging from potential interest rate hike signals, government bond prices may continue to fall. 10-year U.S. Treasury yields struggle to peak. The yield of short term treasury bond and long term treasury bond will continue to rise, and the 2-year rise will be even more dramatic, increasing the spread further, which means that the yield curve will continue to be inverted. Investors may continue to long short term treasury bonds and short long term treasury bonds. 

Graph from: https://finance.yahoo.com/quote/TLT/

This graph shows the price trend of TLT (20+ year Treasury bond ETF), which has high correlation with the future price of these bonds. The price of long-term bonds continued to fall at the beginning of the year as investors shorted them due to the continued sharp interest rate hikes. There were signs of a bottom in June perhaps because the rate hike was expected to top out at the time. However, with today’s clear signs of interest rate hikes, the bond price will keep under pressure. Due to these reasons, investors may remain short TLT or long its put option.

Conclusion:

From July 26th to 27th, the Fed will hold a July meeting on interest rates. Given the current high inflation in the market, it is expected to raise interest rates by at least 75bp. This will further subject bond prices to downside risks, and investors will choose to short long-term bonds and long short-term bonds. Investors continue to bearish the TLT price.

Written by Tingjun Kang

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What Happens to Bond Prices as Interest Rates Rise?

Trading and Investing