Investors Fade Post-Fed Rally As Rates Spike

The U.S. 10-year Treasury yield hit a new high today, spooking equity investors.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

Markets got a jolt of much-needed relief in the aftermath of the Federal Reserve’s largest interest rate hike in 22 years, but concerns about surging inflation are pushing markets back down. 

As expected, the U.S. central bank raised its benchmark federal funds rate by 50 basis points on Wednesday, a move that initially did little to change the direction of markets. The S&P 500 swung just above and below the unchanged mark in the first half an hour after the policy decision.  

But once Fed Chair Powell began speaking at his press conference, the stock market shot higher, concluding with its biggest gain on the day of a Fed decision in more than a decade—up 3%. The reason? Powell expressed confidence that the central bank would be able to wrangle inflation without tipping the economy into a recession, and most importantly, without hiking rates by a massive 75 basis points at any individual meeting.  

“A 75 basis point increase is not something the committee is actively considering,” Powell said. 

Along with stocks, the admission sent bond markets rallying as well. The U.S. 10-year Treasury bond yield fell from around 3% before the Fed’s decision to 2.93% afterward.  

Expectations for the rate increase at the Fed’s next meeting in a month also ratcheted lower, from the possibility of a 75 basis point hike to the near-certainty of a 50 basis point hike. 

Far From Dovish  

Even though he may have taken the bigger hammer off the table, Powell was by no means dovish. He noted that additional 50 basis point increases “should be on the table at the next couple of meetings.” 

That may be why, after the brief post-Fed-decision pullback in yields, rates are spiking again today. The 10-year Treasury hit a new cycle high of 3.03% on Thursday morning, though the two-year is still about 10 basis points below its high on Wednesday. That’s steepened the yield curve and may indicate the bond market’s confidence in the ability of the Fed to bring inflation down without sparking a recession.  

Still, higher rates are still unsettling for investors. Bond ETFs (whose prices move inversely with rates), are hitting new lows for the year this morning, extending their historically brutal losses.  

The iShares Core U.S. Aggregate Bond ETF (AGG), the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) are down by 9.6%, 11%, and 21%, respectively, for the year. 


YTD Returns For AGG, IEF, TLT 


Meanwhile, stocks are lower too, with the S&P 500 having lost about half of its gains from Wednesday, as of this writing. That still leaves the index above its recent lows and the support area that extends back to March, though that’s little consolation for investors who are sporting big losses for the year.  

Including today’s declines, the SPDR S&P 500 ETF Trust (SPY) is down 11% year –to date, while the Vanguard Information Technology ETF (VGT) is down 17% for the year. 


S&P 500 


Looking Ahead  

Where this all shakes out will ultimately come back to inflation and how it evolves over the course of the year. Though there have been signs of inflation potentially peaking early this year, inflation is expected to stay well above the Fed’s 2% target for the foreseeable future.  

Five-year breakevens—a market-derived measure of inflation expectations—remain stubbornly elevated. That may be why fed funds futures are now expecting the Fed to raise rates to as high as 3.75% by the middle of next year, up from 3.25% before the latest Fed meeting. 


5-Year Breakevens 


In other words, even though Powell may have taken a 75 basis point hike off the table, the market isn’t convinced that he and the Fed have truly taken a dovish pivot; and even if they have, inflation will force them to stay aggressive against inflation.  

For investors looking for clues on how this inflation saga plays out, the next key data points to watch are the nonfarm payrolls report for April, which comes out Friday, and the Consumer Price Index reading for April, which comes out next Wednesday. 


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Sumit Roy is the senior ETF analyst for, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for, with a particular focus on stock and bond exchange-traded funds.

He is the host of’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays,’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.