The Fed's rate is only half the judgment for a long bond
Buying long bonds solely on the Fed's rate leaves half the judgment unfinished. From September 25 to October 1, the US 2-year yield fell 3bp while the 10-year rose 7bp. For my bond's price, I need the market yield at the maturity I hold.
Begin with the actual policy decision. The Fed held its target at 3.50–3.75% on July 29, then raised it to 3.75–4% on September 16. Both bounds increased 0.25 percentage points, or 25bp. The Fed sets the target range for the overnight federal funds rate. A traded 10-year Treasury yield does not simply copy that number.
2-year −3bp, 10-year +7bp: the spread widened from 36bp to 46bp
The final observation in the H.15 table released October 2 was October 1: 4.78% for the 2-year and 5.24% for the 10-year. Against September 25's 4.81% and 5.17%, the short maturity fell while the long maturity rose. The spread widened by 10bp, from 36bp to 46bp.
These observations do not show every Treasury maturity receiving the same yield move. Explaining the price of a 10-year bond with the 2-year move conflicts with the observed directions. First identify which line is closer to the bond I own.
These five observation days are at the end of September and start of October, distinct from an event window measuring the immediate September 16 policy reaction. One basis point is 0.01 percentage points. H.15 constant-maturity yields are annualized readings from the market curve, distinct from a bond's coupon or the yield at which I bought it.
| Measure | Sep 25 | Oct 1 | Change |
|---|---|---|---|
| US 2-year | 4.81% | 4.78% | −3bp |
| US 10-year | 5.17% | 5.24% | +7bp |
| 10-year minus 2-year | 36bp | 46bp | +10bp |
A long bond needs conditions for lower long yields
A long yield combines expectations for the path of short rates with compensation the market requires for holding money at risk over time. The Fed's term-structure model describes expected short rates and a term premium separately. That is why one near-term policy decision cannot set the value of all payments across ten years.
Stable inflation and lower compensation for long holding risk can create conditions for lower long yields. Conversely, even with rate-cut expectations, inflation risk or a larger required holding premium can keep them firm. To expect a long bond's price to rise, check whether the required yield at its maturity is actually declining.
This 7bp rise cannot be attributed to a particular cause from the table alone. The table shows maturity-specific results; a causal decomposition requires further analysis. Whalehunter's judgment is clear here: expected policy cuts and lower long yields should not be treated as interchangeable when valuing a long bond.
The same small 7bp move reaches a longer bond's price harder
A fixed-coupon bond is repriced against new market yields. Discounting future payments at a higher yield lowers their present price. The SEC explains that, with comparable credit and coupon terms, longer bonds are more sensitive to yield changes. The calculation below illustrates that relationship.
To isolate maturity, assume a face value of 100, a fixed annual coupon of 5.17% paid semiannually, and redemption of 100 at maturity. Change the remaining maturity to 2, 10 or 30 years. In all three cases, increase the yield by 7bp from 5.17% to 5.24%. The 7bp comes from the observed 10-year change above, but applying it to every maturity is a comparison assumption. The actual 2-year change was −3bp.
Under these conditions, the 10-year price changes from 100 to about 99.46, while the 30-year price becomes about 98.95: approximately −0.54% and −1.05% for the same 7bp shock. The same cash flows are valued at two yields with no payment or passage of time between valuations, isolating the price effect. Credit risk, tax, fees and exchange rates are held fixed.
| Remaining maturity | Initial price | Price at a 5.24% yield | Price change |
|---|---|---|---|
| 2 years | 100.00 | 99.87 | −0.13% |
| 10 years | 100.00 | 99.46 | −0.54% |
| 30 years | 100.00 | 98.95 | −1.05% |
Face value 100; annual fixed coupon 5.17%; semiannual payments; redemption 100. Price is the sum of each coupon and principal discounted by (1+annual yield/2) to its payment period. These are equal-assumption calculations, not observed traded product prices.
Interest through maturity and the price of an early sale differ
For a fixed-rate bond held to maturity, the promised coupon stays unchanged as market yields move. Selling early or marking a bond fund brings market price changes into profit and loss. A Treasury's status does not fix the price available for an intermediate sale.
Separate when I need the money from the bond's remaining maturity. If I put money needed in six months into a long bond, what matters in six months is the sale price then, not the principal promised far in the future. A short holding period does not remove the yield sensitivity of long cash flows.
Korean readers also need the result in won. Currency hedging and dollar exchange-rate changes can alter the won return, so the dollar bond price alone does not explain it. Record separately the choice to receive fixed interest, the bet on an intermediate price gain and the decision to hold dollar exposure.
Update the judgment with inflation's composition and the jobs trend
Long yields falling while inflation eases and demand holds differ from yields falling while demand and earnings expectations deteriorate sharply. Both can support existing bond prices, but they do not imply the same stock-earnings outlook. Read yields alongside company earnings.
In the next CPI release, go beyond the annual rate to monthly momentum and shelter's composition. For jobs, update the trend using both the new month and earlier revisions. Ask whether these releases create conditions for lower long yields, then compare with what the market's long-maturity yield actually does.
Use the same order after the October 27–28 FOMC meeting: read the new policy target, then compare 2-year and 10-year yields on the same observation date. Add my holding's maturity and intended sale time to turn the rate news into a judgment about my bond.
Next: inflation, jobs and long yields together
After the Oct 27–28 FOMC meeting, compare the new statement with 2-year and 10-year yields on the same observation date.
- How did the target range and inflation or activity assessment change?
- Did 2-year and 10-year yields move together?
- Did inflation continue easing while jobs and demand held up?
