Learning from history: When the Federal Reserve meets, stocks and bonds in the United States rise together

According to the Zhitong Finance and Economics APP, as Federal Reserve officials begin a two-day policy meeting, history is on the side of the stock and bond markets. An analysis by Citigroup shows that in the past eight Federal Reserve meetings over the past year, the stock and bond markets have seen weekly gains in six of them.

This trend seems to have already begun this week, with both U.S. long-term treasuries and the S&P 500 index closing higher on Monday. In fact, the U.S. bond market is poised for a third consecutive month of gains, the longest streak in three years, as expectations grow that Fed Chair Powell will signal the start of a dovish cycle.

Citigroup strategists Jabaz Mathai and Alejandra Vazquez wrote in a report, "We believe that U.S. bonds may see a rebound at least by the end of the Federal Open Market Committee (FOMC) meeting on Wednesday. As the FOMC meeting takes place this week, financial conditions in the U.S. have eased somewhat as Powell has overall conveyed a more dovish tone than expected."

In any case, the past records are encouraging for the bulls. Based on Citigroup and related compiled data, in the past eight Federal Reserve meetings, on average, the yield on the 10-year U.S. Treasury fell by about 12 basis points, while the S&P 500 index rose by 1.5%.

The trend of rebounds in the stock and bond markets before and after the Federal Reserve meetings - a phenomenon known as the "pre-FOMC drift" - has long puzzled investors. This phenomenon has remained largely unchanged since Powell introduced the most aggressive monetary tightening policy in decades at the beginning of 2022.

Although the Federal Reserve is expected to maintain benchmark interest rates at their highest level in over 20 years this week, traders will closely watch for signs that the Fed is about to start easing policy. Derivatives traders have already fully priced in the impact of a 25 basis point rate cut in September, totaling a cut of about 64 basis points by the end of the year.

However, while Citigroup strategists point out that the stock market usually maintains its upward trend after a rebound, they note that it is "cautious" to exit bond long positions before the U.S. jobs report on Friday - as the U.S. jobs report often triggers significant market volatility.

The bank's strategists stated, "FOMC meeting days often lead to a decline in bond yields and a steepening yield curve, with the stock market also rising and continuing to rise on the second trading day," but looking beyond Wednesday, "the bond market will need weaker-than-expected data to sustain further rebounds."