Why the FOMC minutes soothed Treasuries
What pulled Treasury yields in opposite directions? (Part 1 of 10)
Secondary market
Treasury yields rose across the yield curve in the week ending February 20, 2015. The rise made it the third consecutive week that yields rose. From the two to 30-year segment, the rise in yields was in the range of one to 11 basis points, or bps. The yield on the benchmark ten-year Treasury notes, or T-notes, rose 11 bps week-over-week. It ended at 2.13%. This was one bps lower than the highest level seen so far in 2015. The high was also touched during the week on February 17, 2015.
Greece deal pushes yields up
Yields gained after Eurozone leaders, meeting in Brussels, reached a provisional deal on February 20 to bail Greece out for another four months. Greece has to meet conditions on economic reforms in this timeframe. The deal is provisional because Greece’s reform measures have to be endorsed by the troika, the ECB (European Central Bank), the European Commission, and the IMF (International Monetary Fund).
If this deal hadn’t come through, it would have stopped financing to Greece’s banks. This would have potentially forced the nation out of the Eurozone—an event that would have caused a lot of volatility in financial markets across the world.
FOMC minutes
The FOMC’s (Federal Open Market Committee) minutes helped Treasuries claw some losses back. Although the rate-setting committee didn’t close the window on a rate hike mid-year, it sounded more dovish than what had been expected. This led yields to fall across the curve. The three-year and five-year securities’ yields fell by ten bps each on February 18—the day the minutes of the January meeting were released.
You can read more about the FOMC minutes in Fed’s January meeting minutes – a wait-and-see approach.
Investor impact
The fall in Treasury prices led to a fall in associated ETFs. The iShares Barclays 20+ Year Treasury Bond Fund (TLT) fell the most. It was down 1.3% for the week. The iShares Barclays 7-10 Year Treasury Bond Fund (IEF) fell 0.5%.
ETFs tracking the broader fixed-income market also fell. The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) fell 0.2% each in the week. In contrast, the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) didn’t move week-over-week.
Apart from impacting fixed-income markets, the FOMC’s announcements and minutes also impact the equity markets and associated ETFs—like the SPDR S&P 500 ETF (SPY) and the iShares S&P 100 Index Fund. These ETFs invest in companies like Apple (AAPL), ExxonMobil (XOM), and Microsoft (MSFT).
In the next part of this series, we’ll see why the demand for 30-year inflation-protected bonds surged in February.
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