The Bond Market

Markets are a kaleidoscope that keeps changing shape. It’s easy to over-focus on the details and lose perspective. So in the coming weeks, I want to go through the markets one by one, stare at the numbers, and ask a lot of questions. I start with the US bond market, not because it is the most interesting, but because this is where money is priced for the world’s reserve currency and everything else derives from that pricing. The price one pays for stocks, for instance, is directly related to the cost of money.

Discounting

The starting point is what is discounted. The Fed sets the rate on cash and there are futures markets that then estimate where that rate will be. This isn’t an academic exercise, I buy and sell these contracts. The predicted Fed Funds policy rates are below.

The current Fed Funds policy rate is 5.3%. The market is now discounting the possibility, post Powell’s Jackson Hole speech today, of more tightening and then maybe easing a year from now, but no meaningful change for roughly a year.