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Why US fixed income markets anticipated the Fed’s taper

Phalguni Soni

Do mortgage rates follow movements in Treasury yields? (Part 5 of 9)

(Continued from Part 4)

Fixed income securities and the Fed taper

As we mentioned in the previous part of this series, yields on 30-year Treasury securities reached a two-year high in August 2013, at 3.9%, while the 30-year conventional mortgage rate reached its 2013 high in August, peaking at 4.58%. But by the end of October, Treasury interest rates dropped again, to 3.62% for 30-year Treasury bonds (TLT), due to flight-from-safety flows from emerging markets (EEM) as a result of structural factors in several EM economies. This raised prices of U.S. fixed income securities and decreased interest rates.

The Fed’s FOMC meeting in October reiterated the Fed’s commitment to an accommodative monetary policy. However, some market participants anticipated an announcement on the taper at its next FOMC meeting due to improving indicators in certain sectors—notably housing—and an unemployment rate falling faster than anticipated.

Market expectations with respect to the Fed’s taper announcement as well as the onset of the taper itself largely led to interest rate increases in 2013, with the 30-year U.S. Treasury (TLT) constant maturity rate increasing to 3.96% by the end of 2013. This was an increase of 101 basis points over the previous year. Thirty-year conventional mortgage rates (MBB) reached 4.53% in the beginning of January 2014—an increase of 118 basis points since the start of 2013. April 30 to December 31, 2013, saw the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, rise almost 15%. The price increase between December 18 and December 31, 2013 was 2.2%.

To find out why interest rates rose, read on to Part 6 of this series.

Continue to Part 6

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