The Fed is Bashing Bonds

One of the big conclusions Jim Bianco made last week is that when the Fed speaks and the bond market doesn't like what it hears (dovish monentary policy, greater risk being for deflation), bonds tank. We'll we see if that happens again today. Bianco and the team at Arbor Research offer this comment: "Since the FOMC adopted the "Bernanke view" on May 6 (pursuing inflationary policies to prevent deflation), every time the FOMC/Greenspan speaks, the bond market has collapsed. It's a record that would make G. William Miller jealous. Witness: "On June 25, the FOMC cut the targeted federal fund rates 25 basis points to 1.00%. Bonds fell over three points – their worst reaction to an ease in the history of the Greenspan Fed (Since Greenspan became chairman, the Fed has moved the funds rate 77 times - 45 eases and 32 hikes). "On July 15, Greenspan spoke about the economy. In his testimony, twice he said: "The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance. "That day bonds fell over two points, their worst reaction to any of Greenspan’s 171 testimonies since becoming Fed chairman in August 1987. "On August 12 the FOMC re-iterated its dovish talk of June 25. The next day bonds collapsed over 2 ½ points. "On August 29, Greenspan spoke at "Fed camp" (Jackson Hole WY gathering). Over the next two trading days, bonds slumped almost 3 points. "Will this FOMC meeting be the next in a line of bond market sell-offs in reaction to dovish statements? " If the Bianco crew is right, you could do worse than buy puts on TLT or IEF, the Lehman bond funds that trade like stocks. The chart below shows what Jim pointed out...bonds selling off on Fed dovishness.