With the FOMC winding up their June meeting today, the financial news shows and press will be all about whether or not they will vote to increase short term rates, by how much and then immediately start to speculate about the pace of future rate increases. Let me save you some time. The CME uses data from the Fed Funds futures market to provide an estimate of the probability of future interest rates. This morning it suggests traders have given a 99.6% chance the FOMC raises raise today.
Since we have that out of the way, we can now move on to what might happen. I will leave the prognostications to the professional pundits and rather look at the data. Since the March meeting the probability of a June rate hike has been steadily rising. And so have the price of Treasury Bonds.
There is a perception that if Treasuries are rising then equity price must fall. The chart below shows that is just not true, all of the time. The blue boxes show period over the last 15 years where stock and bond prices have risen in tandem. Notice the move from 2002 until 2007, a 5 year period where they moves together. Even without the blue boxes, the general drift since the 2009 low has been higher for both.
So should you be worried that with a Fed that is likely to raise rates, and Treasury prices rising that this means equity prices must fall? It appears the answer is no. Anything can happen and correlations from the past could end any moment, but history has shown your fear may be misplaced. It may be best to follow the price action in both bonds and equities and wait for each to show that they have reversed before acting, rather than potentially miss another 5 year period of strong correlation.
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