Must-know: Why the latest FOMC meeting left bonds flat
The ten-year bond is the building block for many important interest rates
The roundup is a weekly series in which we discuss the week’s trading in government bonds and TBA (to-be-announced) mortgage-backed securities. We’ll see where mortgage rates have been and we’ll go over the weekly economic data and earnings announcements. Then we’ll look forward to what’s coming up the following week. The information in this series will be relevant to mortgage REITs like American Capital Agency (AGNC), Annaly (NLY), Hatteras (HTS), Capstead (CMO), and MFA Financial (MFA), as well as people who invest in fixed income ETFs like TLT or in homebuilders.
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Bonds are flat
The ten-year bond yield ended the week where it began, around 2.6%, which is surprising given that that we had the FOMC meeting. The ten-year bond yield had been trading in a narrow range of 2.6% to 2.8% for several months, and it broke out of its range a couple of weeks ago. Technical traders may have been playing that range, and when it broke, it may have triggered some stops. The decision by the ECB (European Central Bank) to start paying a negative interest rate on deposits may have been a factor as well.
Bonds sold off a bit on the Consumer Price Index, which came in stronger than expected at 0.4% month-over-month and 2.1% year-over-year. That pushed the yield on the ten-year up to 2.65%. However, during Janet Yellen’s post-FOMC press conference, she was asked about the high CPI number and basically dismissed it with an observation that the consumer price index tends to be noisy. Incidentally, that noise is part of the reason why the Fed prefers to use personal consumption expenditure data to measure inflation.
The FOMC meeting had no surprises and no change in the Fed Funds forecast. Bonds recouped the losses on the CPI print and ended the week more or less where they began.
In the the next parts of this series, we’ll look at trading in the TBA market (which is the basis for mortgage rates) and see where mortgage rates have been for the week.