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Must-know market reactions as the taper continues in June 2014

Surbhi Jain

Must-know market reactions as the taper continues in June 2014 (Part 5 of 5)

(Continued from Part 4)

Treasury yields declined

Treasury yields shed points in reaction to the FOMC statement issued pursuant to the FOMC meeting held on June 17–18, 2014, when the FOMC decided to taper its asset purchase program by another $10 billion, bringing its monthly asset purchases to $35 billion. At each FOMC meeting since December 2013—March and now April—the FOMC has cut $10 billion from its asset purchase program. The taper helps the Fed keep a tight grip on interest rates. The Fed also restated its plan to keep the Fed funds rate low for some time even after the end of its asset purchase program.

Treasuries saw a rise in prices as yields dropped. The benchmark ten-year Treasury bond lost 5 basis points, or about 1.9% in yield, while the five- and 30-year Treasuries shed 6 basis points and 1 basis point, respectively.

Corporate bonds gained

The prices of popular bond market exchange-traded funds (or ETFs) like the iSharesiBoxx $ High Yield Corporate Bond ETF (HYG), the SPDR Barclays High Yield Bond ETF (JNK), and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), also saw a rise in their prices on June 18, following the FOMC meeting announcement. The prices of these ETFs rose by 0.45%, 0.34%, and 0.58%, respectively. HYG and JNK track non–investment-grade corporate bonds, while LQD tracks the performance of 600 highly liquid investment-grade corporate bonds.

The stock market gained on the news. The Dow Jones Industrial Average was up about 0.58% and the S&P 500 gained close to 0.77%. The S&P 500 is a stock market index based on the market capitalizations of 500 large companies, like Exxon Mobil Corp. (XOM) and Microsoft (MSFT), with common stock listed on the major U.S. exchanges.

The stock market rose despite the downward revision in the real gross domestic product (or GDP) projection as released with the Statement of Economic Projections for June 2014. The committee has revised the long-term change in the real GDP range from 2.2% to 2.3% in March 2014 to 2.1% to 2.3% in June 2014. Along with the real GDP estimates, the committee also revised its long-term unemployment rate projections from 5.2% to 5.6% in March to 5.2% to 5.5% in June.

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