In theory, how should bonds react when the fed officially stops
raising interest rates? (i.e. short-term bonds vs. long-term bonds)

Thanks

Hi! Thanks for the question.

Theoretically, if the Fed stops raising interest rates, then bond
prices will be given a boost since bonds move inversely proportional
to interest rates.


?Bond prices move inversely to interest rates. When interest rates go
up, bond prices go down and when interest rates go down, bond prices
go up.?


?Understanding Bond Prices and Interest Rates? By Ken Little
http://stocks.about.com/od/understandingstocks/a/Bondint111004.htm 


It is also believed that the longer the terms on a bond, the riskier it gets.

??changes in interest rates don't affect all bonds equally. Generally
speaking, the longer the bond's maturity, for example a bond that
matures in ten years versus another that matures in two years, the
more it's affected by changing interest rates. A ten year bond will
usually lose more of its value if rates go up than the two year note.
Also, the lower a bond's "coupon" rate, the more sensitive the bond's
price is to changes in interest rates. Other features can have an
effect as well. For example, a variable rate bond probably won't lose
as much value as a fixed rate security.?

?What You Should Know?
http://www.investinginbonds.com/learnmore.asp?catid=3&id=57 


Please read the following articles.

?Why do interest rates tend to have an inverse relationship with bond prices??
http://www.investopedia.com/ask/answers/04/031904.asp

?What is the relationship between interest rates and bond prices??
http://www.faqfarm.com/Q/What_is_the_relationship_between_interest_rates_and_bond_prices


Search terms used:  
" relationship bond bonds prices "interest rates"

I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
you would need further information.
                                                          
                              
Regards,                              
Easterangel-ga                              
Google Answers Researcher

I think this is a great overview of how bond prices move when the
interest rates changes, but I fail to see the corelation to the
statement "when the fed stops raising interest rates"  i.e. when the
fed takes no action.

I think there is a very complex issue that would cover things like
market expectation... i.e. what does the market expect.

Bond prices may decline in anticipation that the Fed will raise rates,
so when it announces that it will not be doing so, prices may increase
to reflect this.

Thank you myoarin-ga for providing a correct and simple reply to the
comment of vballguy-ga!

The explanation is top notch! :)

And thank you, Easterangel.  Doesn't your "Angel" have a birthday about now?
Wish her/him a very happy one, if belatedly.  ;)

It is a bit more complicated than that

Short dated bonds and Long dated bonds are different animals

- they are bought by different people (or rather institutions)

Some institutions are interested in covering their backs for 20 years,
in which case they are really only interested in the cash coupon, the
maturity value is discounted to zilch anyway.

Others are interested in a short term 'park' for their cash, but in 2
months, 2 years or 5 years they are going to need a new parking lot.

Dim and distant bells are ringing 'Malkiel'

Other bells are objecting to Floaters being classified with Straights
- Floaters are hybrid Notes.

Hi myoarin-ga!

She just finished hers at the end of last year. It's a good thing she
only has one birthday or I'll be broke by the time the year ends. :)