The Federal Reserve keeps telling the bond market it wants interest rates to move higher, but traders aren’t listening.
That suggests investors don’t believe the Fed’s justification for interest rate increases, which are predicated not only on recent economic improvement but also on a continued bright outlook.
One startling chart from Societe Generale’s Albert Edwards illustrates the Fed’s dilemma. Two-year notes are historically the maturity that is most responsive to moves in the official federal funds rate.
But look at what’s happened to the two-year note’s yield this year as the Fed ratcheted up its monetary tightening campaign. Absolutely nothing.