Bond yields were in flux in October, pricing in a more aggressive path of Fed rate hikes in the process. As a result, the broad market return was negative for the month as shown in the -0.43% result for the Bloomberg U.S. Intermediate Aggregate Bond Index. The world is in the middle of a transition away from crisis-induced easy monetary policy toward some semblance of normal, and all things considered, the bond market is behaving rather well.
With respect to the yield curve, short term maturities (less than one year) remain anchored near zero since the fed funds rate remains at the zero bound and likely will through at least mid-2022. The real action in October was in the two to tenyear part of the curve, where yields rose from 6 to 25 basis points even as yields fell on the thirty year bond. These rising yields were mostly a reaction to persistent inflation coupled with increasing evidence that the labor market is tighter than the Fed believed earlier this year. Both of these facts make an earlier “lift-off” by the Fed more likely, which is why two rate hikes next year are now reflected in market yields.
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