We’re in the midst of a bond market rally. In the last eight weeks — barring Monday, when the bond market retreated a bit — bond prices have been going up, as their yields — the annual interest rate they pay — have been going down.

Last week, the yield on the benchmark 10-year Treasury note fell 21 basis points, to 4.22%. And it’s been falling since it peaked back in late April at 4.88%.

Generally speaking, it’s a pretty good thing when interest rates fall. It’s good for stocks because it means it’s cheaper for companies to borrow and invest. It’s good for housing because lower mortgage rates mean more people can afford to buy. It’s good for consumers because they can buy more and pay less on their credit cards.

But why is it happening now? It’s all about the Federal Reserve and what investors think the Fed will do next.

Remember last week, when the interest rate on the 10-year Treasury was falling, pretty precipitously? “An interesting week for economic data,” said Joanna Gallegos, co-founder of BondBloxx.

She noted that both consumer and producer prices moderated. 

“It appears that inflation has cooled a little bit more than anticipated. And then in addition to that, we also saw unemployment tick up. That’s another contributor to inflation slowing down,” she said. More unemployment reduces pressure to raise wages.

What does all this point to?

“A healthy economy that investors are convinced will prod the Federal Reserve to start cutting interest rates. The expectation clearly is that rate cuts are going to happen, it’s just a matter of when, and probably by September,” said Guy Cecala, founder of Inside Mortgage Finance.

The Fed’s got interest-rate-setting meetings in July and September. But here’s the thing: It met just last week. 

At that meeting, “they changed their forecast,” said Joanna Gallegos. “They said for the end of the year, we anticipate only making one rate cut versus three.”

Basically, said Karen Petrou, a managing partner at Federal Financial Analytics, the bond market is saying to the Fed: “We can hear you. We’re just not listening.”

“Even though [Chair] Jay Powell said, ‘We’re going to keep rates about where they are for a while. We don’t think we’ve beaten inflation yet,’ the market is essentially saying, ‘We think you have, and you’re going to be cutting rates as soon as September,'” Petrou said.

Based on that belief, investors bid up bond prices, sending the interest rate on the benchmark 10-year Treasury note lower. 

“Traders think the Fed is overcautious, and the Fed will be able to cut rates. Indeed, it may have to cut rates because the economy will be softening,” she said.

But Petrou pointed out that so far, the Fed has confounded market expectations, keeping rates higher for longer.