Why Treasury yields climbed and stocks rose to a new record
Market activity in high-grade bonds for the week ended September 5 (Part 5 of 10)
Treasuries react to a recovering economy
Last week’s upbeat economic data resulted in higher Treasury yields. Yields from one year to 30 years rose on the better-than-expected data. 30-year Treasury yields rose the most, by 14 basis points to 3.23%. Ten-year Treasuries rose by 11 basis points to 2.46%.
An expanding economy usually raises inflation concerns. Higher inflation expectations tend to raise nominal yields on bonds. Also, in the present low-yields environment, better-than-expected economic growth raises worries that the Fed will bring forward its rates-tightening cycle. The Fed is widely expected to raise the Fed funds rate sometime in 2015.
Bond prices and yields move in opposite directions. When bond yields rise, prices fall, and vice versa. So ETFs investing in Treasury securities experienced price declines.
The Vanguard Total Bond Market ETF (BND) fell by 0.38% over the week ended September 5. BND holds debt in both Treasuries and corporate investment-grade bonds. The iShares Barclays 7-10 Year Treasury Bond Fund (IEF) declined by 0.82%, while the iShares Barclays 20+ Year Treasury Bond ETF (TLT) fell by 2.57%. TLT would experience greater price volatility in response to changing yields as it has holdings in longer-dated Treasuries.
But returns on inverse bond ETFs were positive. The ProShares Short 20+ Year Treasury ETF (TBF) rose by 2.61%, while the ProShares UltraShort 20+ Year Treasury ETF (TBT) rose by 5.18% over the week.
Major stock market indices were up over the week. The S&P 500 Index (SPY) (IVV) rose by 0.22% over the week to 2007.71 on Friday, a new record. Besides the positive economic data, the S&P 500 Index was also boosted by Russia and Ukraine calling a truce. A decline in geopolitical risk is generally bullish for stocks.
The next part will have a yields and returns analysis for high-grade bonds.
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