Must-know: Why investors favor long-term Treasuries again (Part 7 of 8)
The impact of the FOMC and economic forecasts
The Fed’s third Federal Open Market Committee (or FOMC) meeting of the year took place June 17–18. Always a market-moving event, the Fed’s statement at the end of this FOMC is expected to provide updated economic forecasts as well, which are key drivers for both stock (VOO) and bond (BND) markets. Besides the expected $10 billion tapering announcement, the Fed will also be releasing its updated economic forecasts for GDP growth, inflation, and the unemployment rate.
An uptick in the Fed’s assessment of economic fundamentals going forward is likely to increase yields for Treasuries, especially long-term Treasuries (TLT) and intermediate-term Treasury (IEF) maturities. An increase in yields means a fall in bond prices. The reverse is also true. However, with Q1 2014 GDP contracting by 1%, the Fed’s GDP growth forecast for 2014 is more likely to be revised downwards, which should act as a brake on upward yield movements, all else constant.
The Fed funds rate
The Fed will also release the Fed’s “dots” along with the economic forecasts slated for release at the end of the June FOMC. The “dots” are estimates on the likely path and level of the Fed funds rate by the 12 members of the FOMC. If the forecasts anticipate a quicker- and higher-than-expected rate rise, this would increase Treasury yields across the yield curve for both short-term Treasuries (SHY) and longer-term Treasury securities. The reverse is also true.
These forecasts are keenly watched by economists and investors all over the world and can significantly impact both stock (VOO) and bond (BND) markets. In the next part of this series, we’ll analyze other key factors driving Treasury markets. Please read on.
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