Trying to put some context from the Economics portion of the curriculum to recent events.The Fed set a target rate of 2.25%.
I want to ask the following:
Does that mean that financial institutions who want to borrow money from each other must now pay approximately 0.25% higher on their loans?
How does the rate hike affect the Yield on Treasuries?
The equity market saw a drop in valuation after the rate hike, but, we know that this was due to cheaper valuations now that the cash flows were being discounted at a higher rate. However, using CAPM this means that the rate hike would be implied through the risk free rate, which must mean that a Fed rate hike must affect treasuries correct?
Someone once told me that if the Fed raises rates by a certain %, then the overnight rate decreases by that same % amount. Is that true? How so?
New issuances will have lower prices (higher yields) and existing bonds will decrease in price, so investors will tend to buy more bonds now and less equity. This is called portfolio adjustments or simply rebalancing.
The biggest factor is portfolio rebalancing. Rational expectations about new actual returns, expected returns and required returns going higher makes equities less desirable against fixed income. This is not necessarily a shock from a crisis, so alternative investments like gold, real estate, other commodities are not going to be impacted in the short term.
If the yield curve is upward sloping (like now), I doubt this to be true. Never seen or heard about a broken curve like " V " or " Λ ", where super short-term rates (overnight) get lower when longer terms get higher (ex: 3m) and vice versa.