Short-term rates move ahead of Fed

With a quarter point hike in the discount rate, the Fed surprised some in the media, but few in the bond market. As one of the most interest rate sensitive asset classes, the bond market often moves before an actual Fed move. First, the Fed has been jawboning about the end of quantitative easing for some time now. Second, the Fed specifically mentioned the possibility of future rate increases last week, which was noted in the Market Message on Wednesday, February 10th. Third, short-term interest rates have been moving higher since November. Yes, the bond market has been pricing in some sort of rate increase or tightening since November. The chart below shows the 3-month T-Bill Rate ($IRX) over the last 12 months. Short-term rates declined from March 2009 until November 2009. Rates bottomed in late November and moved higher the last three months - well ahead of the Fed move. Even with the three month advance, short-term rates are still historically low.

Click this chart for details