Simulate how market expectations, forward guidance, and growth revisions cause long-term yields to drop even as short-term policy rates rise.
Why did 10-year yields drop when rates rose? The Fed delivered the expected 50 bps, but forward guidance signaled aggressive policy tightening that will choke off long-term economic expansion and rein in inflation. Investors immediately rushed into safe, long-duration Treasuries to lock in peak yields, bidding bond prices up and pushing yields down.
| Maturity | Pre-Yield | Post-Yield | Yield Delta | Est. Duration | Est. Price Move |
|---|
1. "Sell the rumor, buy the news": If bond traders anticipated a 50 bps hike and positioned for it weeks in advance, delivering only 25 bps is actually a dovish easing of expected tightness. Yields immediately sink.
2. Long-term bonds look 10–30 years out: The Fed only directly controls the overnight Federal Funds Rate (0-day maturity). A 10-year bond reflects the expected average of overnight rates over the next 40 quarters plus a term premium.
3. Inflation Expectations: If a firm hike convinces the market that inflation will fall from 4% down to 2%, long-term bonds require much lower inflation compensation.
An inverted curve occurs when short-term yields (like 2-year Treasuries) rise above long-term yields (like 10-year Treasuries). Historically, an inverted yield curve reflects market forecasts of economic contraction and eventual central bank rate cuts.
Bond prices move inversely to bond yields. When bond yields fall, existing bonds with higher fixed coupon payments become more valuable, giving bondholders positive capital appreciation (Price % ≈ -Duration × ΔYield).
The Federal Funds Rate is the rate commercial banks pay each other for overnight reserves. Treasury yields are market-driven auction prices determined by millions of global institutions, sovereign funds, and investors.