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Financial Markets See Changes in Fed Funds Rate, Yield Curve, and Correlation Between Stocks and Bond Yields
Fed Funds Rate Expectations:
The Fed funds rate is a key interest rate that the Federal Reserve uses to manage the economy. There has been a shift in expectations regarding the future path of the fed funds rate, with investors anticipating a more aggressive stance from the central bank. Specifically, there are predictions of an additional 75 basis points increase during the current cycle. This has implications for various financial instruments, including bonds and stocks.
Yield Curve Steepening:
The yield curve is a graph that plots the yields of bonds with different maturities. Recently, there has been a growing consensus among investors that the yield curve will become steeper over the next 12 months. This means that the spread between short-term and long-term interest rates will widen. The implications of a steep yield curve could be significant for various sectors of the economy, such as banks and housing.
Stocks and Bond Yields Correlation:
Typically, when stocks rise, bond yields fall, and vice versa. However, in recent weeks, stocks and bond yields have been rising together. This positive correlation is a departure from the norm and could have implications for how investors diversify their portfolios.