In this Investopedia article,

For example, when the Federal Reserve increased interest rates in March 2017 by a quarter percentage point, the bond market fell. The yield on 30-year Treasury bonds dropped to 3.108% from 3.2%, the yield on ten-year Treasury notes fell to 2.509% from 2.575%, and the two-year notes' yield fell from 1.401% to 1.312%.

I know that interest rate and bond price are negatively correlated: if interest rate goes up, bond prices drops. Also, for a given amount of coupon earned on each period, if the price drops, the yield should increase instead of falling. What is wrong here? Thanks.


1 Answer 1


The Federal Funds rate is an overnight rate. It may move differently from longer term rates such as the yield on 10yr notes. Possible reasons why 10yr yields might move down when the Fed raises the Fed funds rate : (A) the market thinks that the economy will go into recession so the Fed will have to lower rates down the road. (B) the Fed had been expected to raise the Fed funds rate by 50bp but they only raised it by 25bp. Etc.


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