Expert: Doug Ingram - 8/26/2003

Question
What was the effect of interest cuts by the Federal Reserve in June 2003 on bonds

Answer
It's important to remember that the Fed only controls short-term rates.  The Fed had implied that they would use "other methods" to keep rates down, including buying longer issues.  When they only cut 25 bps instead of the 50bps most people expected, long rates went up!  Thus, bonds hated the action.
Stocks were OK with it as low short rates are "stock friendly".  A longer-term effect will be that housing sales and refis will wane as mortgage rates have risen sharply.
It really wasn't the last cut that affected bonds so poorly.  It is a lack of condfidence in the Fed coming from mixed signals, but no doubt - bonds were hit hard.  Very negative!