All eyes were on the Fed today, watching for its latest interest rate decision. The Fed raised its Fed funds target by 25 bp to 4.75%-5.00%.
If you follow financial media, you’ve already seen headlines about this interest rate hike. But where it counts most – the bond market – interest rates have been cut. Just since the beginning of this month the yield on the one year treasury has been cut by 50 bp. The yield on the ten year treasury has been cut by 53 bp.
In just three weeks, the one year rate fell from 5.06% to 4.56% and the ten year from 4.01% to 3.48%.
The multi-trillion-dollar bond market’s rate decisions are the most important of all. You and I can’t borrow at the Fed funds target, and we certainly can’t earn those rates on our savings account deposits. But we can earn Treasury rates. We can buy Treasuries directly from the Treasury through its program curiously entitled Treasury Direct. We can also own treasuries just like stocks via a number of exchange traded funds like SHV, GOVT, EDV, VGSH, VGIT & VGLT. If we have a position in these funds, we can even “borrow” from ourselves at the same rates as the US Treasury.
Even the Fed can’t get too far out of step with the bond market. The bond market hiked rates well before the Fed did. More recently it’s been cutting … the Fed will ultimately follow.