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Why Treasury yields saw mid-term gains but a long-term fall

Why Treasuries were strong while investment-grade bonds were muted (Part 2 of 9)

(Continued from Part 1)

Treasury yields

Weekly fluctuations in Treasury yields are one of the prime determinants of changes in bond prices. An increase or decrease in the Treasury yield and interest rates is mainly driven by overall macroeconomic health, which has a tremendous influence on the fixed income markets. When the economy declines, the Treasury yield curve moves southward, pressuring interest rates and uplifting bond prices. However, the opposite holds true when the economy is improving—Treasury rates and yields increase and pressure bond prices, which decline due to the inverse relationship.

Last week, Treasury yields across the short and long ends of the Treasury curve moved southwards, while the mid-term (two-year to seven-years) continued to gain. The U.S. ten-year Treasury yields slipped 2 basis points last week (March 28) to 2.72% from 2.74% in the previous week (March 21).

As we highlighted in Part 1 of this series, the manufacturing sector and housing prices made a comeback last week. Consumer confidence and spending were mostly mixed. The University of Michigan’s Consumer Survey Center report released on Friday (March 28) showed no improvement in the current consumer financial conditions, remaining steady at 80.0 levels for February. Plus, many consumers indicated a decline in expectations, particularly expectations of the suppressed job markets. Persistently low inflation, at 1.1%, pushed the long-term Treasury yield down last week.

In the next part of this series, we’ll discuss in detail the performance of the short-term (BIL) and mid-term Treasury auctions last week. We’ll also highlight the impact on the major ETFs, including the iShares Short Treasury Bond (SHV), Vanguard Short-Term Government Bond (VGSH), iShares Treasury Floating Rate Bond ETF (TFLO), and iShares 7-10 Year Treasury Bond ETF (IEF).

Continue to Part 3

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