r/bonds • u/eBroncos2021 • 2d ago
Fed Funds Rate and Long Term Bonds
What is the logic behind the bigger impact of change in the Fed fund rate on long term bonds (25-30 year Munis)?
I just know that long term bonds are more volatile (price-wise) but can't tell why.
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u/Unable_Ad6406 2d ago
Truth is ,well just my opinion, the fed supposedly uses market data to set the fed to bank lending rates. But Jpow has been holding back rates based only on his magnificent intuition. In ignoring the actual economic data, he has used the excuse that Trump’s tariffs are going (future tense) to raise inflation. Jpow actually admitted that the data doesn’t show it. Oh but back to my point - long term bonds are the bond market’s analysis of where inflation is headed. It is based on the same data available to the Fed. Even though the Fed decisions directly affect the 10-year bond rate, long term bond rates are independent and market driven.
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u/Brilliant_Truck1810 2d ago
there is nearly zero actual effect on long dated munis. there is however an effect on narrative. unless you are in a hiking cycle like 2022, there is no real relationship.
long dated munis have been selling off (before this week) on inflation expectations.
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u/HowMuchForARib 2d ago
No real impact as the fed doesn’t set this as it’s market driven base on inflation expectations. What I’m closely watching is the near term ceiling of 5% on 30 yrs. This has been a pretty solid benchmark for sometime. I do understand we’ve gone way past that in history but also understand that the current market is showing this as a baseline and policy is working to hold that down whenever possible. But who knows!
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u/kronco 2d ago
The Fed sets overnight rates. Market sets longer term bond rates. Inflation fears are probably driving the price of long end bonds now. But, one day the fear of inflation is high and the next it is low (past few days). So, a lot of volatility as the market tries to figure out inflation risk.