What caused the Treasury yields to fall?
What caused Treasuries to do well? (Part 1 of 7)
Secondary market
Treasuries gained in the week ending January 2, 2015. Yields fell nearly across the curve. Yields and prices are inversely related. As a result, a fall in yields means prices increased. Treasuries from three-year to 30-year maturities saw yields falling in two digits. They were in the range of 12—15 basis points, or bps. The benchmark ten-year Treasury ended the week at a 2.12% yield—down 13 bps from a week ago.
Treasuries gained in 2014. The Federal Reserve’s anticipated interest rate hike didn’t happen. In the last meeting of 2014, the Fed decided to remain patient. You can learn more about the outcome and impact of the Fed’s latest meeting in our series Why the FOMC will remain “patient” in its policy moves.
The Fed’s rate hike will make Treasuries unattractive because prices will fall. The fall will be reflected in ETFs that invest in US Treasuries—like the iShares Barclays 20+ Year Treasury Bond Fund (TLT), the iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and the iShares Barclays 1-3 Year Treasury Bond Fund (SHY).
ETFs that invest across the bond market—like the Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG)—are also affected. These ETFs invest in Treasury notes, or T-notes, and Treasury bonds, or T-bonds.
In the week
Treasuries increase after the ISM’s (Institute for Supply Management) December Chicago Business Barometer fell to 58.3. This is the lowest level since July 2014. A fall in the ISM’s manufacturing PMI (purchasing managers’ index) also helped a fall in yields. Yields also fell as the ECB’s (European Central Bank) president, Mario Draghi, signaled the possibility of additional stimulus by the central bank. He acknowledged the risk of deflation in the euro area. He added that officials “have to act against such risk, even if the risk is limited.”
A fall in yields was also seen after the Greek parliament rejected Stavros Dimas as a presidential candidate. This led to Greece’s Prime Minister, Antonis Samaras, calling for elections in Greece on January 25.
In the next part of this series, we’ll discuss the major economic releases and activity in the primary market.
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