A quarter-percentage-point increase in the Federal Reserve's overnight rate pulled 10-year Treasury yields lower on Wednesday, as traders wagered the move would be enough to bring inflation under control. The bond market moved in a direction that ratified the Fed's tightening intent.
The Federal Reserve's overnight target is the instrument. The 10-year Treasury yield is the verdict. These two rates can diverge: the short end is set by policy; the long end is set by what traders believe policy will eventually produce in terms of growth and inflation across the coming decade.
Wednesday's price action followed a logic the bond market runs regularly. When a rate hike is read as credible on inflation, the inflation premium embedded in longer maturities compresses. Less expected inflation means lower yields, even as the overnight rate climbs.
The Fed raised by 25 basis points. The market answered by bidding up Treasuries. That trade is a bet that the quarter-point move lands where it is aimed.