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Lessons from the bond market
February 2005


Dr. David Kelly
Managing Director
Economic Advisor

Despite six Fed interest-rate hikes since last June, the bond market has remained remarkably resilient. What's the outlook for 2005?

On June 30, 2004, the Federal Reserve Board raised short-term interest rates for the first time in more than four years. Since then, the Fed has boosted short-term rates another five times for a total increase of 1.5 percentage points in the federal funds rate. However, despite this monetary tightening, a consolidation of the economic expansion, the advent of $50-a-barrel oil, and some relaxation in global tensions, bonds have done remarkably well, with 10-year Treasury yields falling by half a percentage point and corporate bond yields falling by more.

But can this surprising bond market performance be explained? And if it can, what does the explanation imply for the bond market outlook from here? At least five factors appear to have contributed to the bond market's remarkable performance:

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