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Today I want to talk about bonds. A lot of investors are excited because bonds have experienced a rally in the past couple of weeks. No doubt, it's been a nice, tradable rally, but in the big picture, bonds are not going anywhere. The larger trend is still down. The only thing that counts when talking about bonds is Fed policy or, more succinctly, the fact that the Fed is still in rate hike mode. It may be on hold at the moment, but it's still officially in rate-hike mode. That's the only thing that matters. 

When bonds were in their historic bull market of the past eight years (really much, much longer), it was because the Fed was either cutting rates or holding them down at zero. Even so, you had many, many countertrend selloffs during that bull market. Conversely, we saw the benchmark 10-year fall below 2% many times, only to see the yield rally back to, or above, 2% numerous times. Each time, however, it ended up falling back down to new historic lows. 

That's because the Fed was holding policy at zero the whole time and saying nothing about raising rates. When it stopped doing that, rates started going up and bond prices started going down and that's the paradigm we've been in since the end of 2015. 

I've explained this before. The rate on a bond is simply the expectation of Fed policy over the term. Some investors recently may have become convinced that the Fed is going to shift policy again and that has caused bond prices to move back the other way (rallied), but unless the Fed comes through on that expectation, rates will ultimately converge back to where the policy direction is. 

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The economic data have been unexpectedly (to some, not me) soft and that has triggered a rally in bonds on the view that the Fed may again start cutting rates. The only problem is, you're not hearing anything about that from Fed officials. Nothing. Nor do I expect them to say that. Once policy starts moving in a particular direction, it tends to stay that way. That's because rate adjustments cause price adjustments that tend not only to stick but be self-reinforcing, and also because the Fed is not wont to change policy too frequently. 

The longer the Fed keeps the current policy in place -- even if that means not hiking rates for a while -- the more likely that bond prices will fall back down and rates will rise again. 

If and when I hear the Fed start talking about cutting rates, that would be something else. Even more to the point, if the Fed actually started to cut rates, I'd switch sides and be outright bullish on bonds in a heartbeat. But not before. Right now, you have to sell rallies if you want to be on the side of the major trend. 

It doesn't even matter where the economic data are, really. If the Fed wanted to keep rates up in an economy that is tanking, it could keep rates up. That's how it works.

At the time of publication, Norman had no positions in the stocks mentioned.