The phrase "buying the rumor, selling the news" is a well-known saying in the finance world, and it accurately describes a common phenomenon where traders act on information about an event well before it occurs. A clear example of this is with Federal Reserve interest rate changes, which even have specific contracts associated with them. Currently, a pertinent example involves pre-election trading, where market participants are pricing in an increased likelihood of a Trump victory and Republican dominance in Congress. Traders anticipated an increase in rates, but determining the precise amount to sell is often challenging. The market has recently demonstrated an impressive ability to sell nearly the appropriate volume based on the rumors. Now, traders are focusing on the actual news.
This process can be illustrated by a table showing 10-year yields, which reached closing levels close to 4.27 for six out of the seven days leading up to election day. As predicted in our basic scenario, there was a further decline in yields post-election, and we have nearly returned to the baseline rate of 4.27.
However, this instance does not perfectly exemplify the "buy the rumor, sell the news" strategy. The 4.27 yield is comparatively high, as seen at the start of the previous week. A true example would have yields around 4%, which does not seem to be in the immediate future. In fact, when 10-year yields hit 4.27 this morning, they quickly bounced back above that level and are currently over 4.31%.
