I titled yesterdays commentary Bond Traders Eager For A Rate Hike.

That was an understatement!

The way the bond market reacted to yesterdays Federal Open Market Committee press conference, you would have thought the Fed eased. Yields dropped 10 basis points across the curve. I thought the bond market would rally as long as the Fed didnt sound too hawkish. The Fed and Janet Yellen did call for three rate hikes this year and the next, but the rhetoric emphasized the gradual nature of the future path. The feared dot game results of where Fed officials seerates going in the future were almost the exact same dots on the chart as in December.

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Nothing the Fed wrote and Yellen said was a surprise, but the bond market had a strong reaction. Large speculative accounts led the rally, most of which were covering shorts. Apparently, a lot of traders were betting the Fed would ramp-up expectations on the timing and extent of rate increase, but this was not the case.

This was a relief rally not one based on anything in the future. The market was priced to account for this one rate hike. Traders have at least two months before they have to worry about pricing in another.

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Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.