Fed Pause Bringing Some Bulls Back to Bonds

Interest rates have been rising and yields have followed the same path. So traders bullish on bonds have essentially been seeing a repeat of 2022’s weakness. However, the recent pause in rate hikes by the Federal Reserve could bring more bulls back.

An indicator of the weakness in bonds this year is evident in exchange-traded funds like the iShares Core US Aggregate Bond ETF (AGG). It’s down about 4% for the year as yields continue to climb. That’s a welcome sign for fixed income investors looking to maximize yield via bond exposure. But they must also be cognizant that price appreciation suffers.

The recent pause by the Fed could signal economic data is showing signs growth might be suffering in the face of monetary policy tightening. In turn, the capital markets responded positively, including the bond market.

“Bonds improved significantly yesterday after the Treasury refunding announcement, economic data, and Fed press conference,” reported Mortgage News Daily. “Most reports attribute the gains to the Fed either ‘holding rates steady,” or ‘hinting at no further rate hikes.'”

Of course, data-dependency by the Fed means numbers can shift and more rate hikes could come. Fed Chief Jerome Powell didn’t rule out that scenario in the latest rate pause.

“Powell was also very clear to leave the door open for more hikes in the press conference,” the report added.