The predominant factor in determining bond market returns in 2013 was the U.S. Federal Reserve’s monetary policy. In the previous parts of this series, we saw how the Fed’s accommodative policy during the first four months of 2013 led to price increases in bond markets across the risk spectrum. The reverse also held true, as the Federal Open Market Committee (or FOMC) meeting held from April 30 to May 1 showed.
At this meeting, the Fed had said that it was looking at exit strategies for its monthly bond buying program ($85 billion at that time). Financial markets took this as a hint that the Fed was considering tapering its monthly bond buying program, which (other factors remaining constant) would lead to increases in yields and decreases in bond prices. This was also a signal to markets that the economic recovery was on track.
While stocks and high yield bonds rallied on this announcement, the prices of investment-grade corporate bonds and long- and intermediate-term government debt securities fell. From April 30 to October 30, 2013, we saw the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, rise 11.5%. The Vanguard Total Bond Market ETF (BND) and the iShares 10-20 Year Treasury Bond ETF (TLH) fell 2.1% and 6.7%, respectively, over the same period. The first ETF tracks the Barclays Capital US Aggregate Bond Market Index, which measures the performance of the U.S. investment-grade bond market. The iShares 10-20 Year Treasury Bond ETF (TLH) tracks the Barclays Capital 10-20 year US Treasury Bond Index, which measures the performance of U.S. Treasury securities that have a remaining maturity of at least ten years and less than 20 years.
The weekly 30-year conventional mortgage rate reached 4.58% on August 22, 2013—the highest for the year. The daily market yield on the 30-Year Treasury Constant Maturity Rate (TLT) reached 3.9% on August 21, 2013—a two-year high and the highest since August 2, 2011.
To learn about interest rate movements after the highs reached in August, read on to Part 5 of this series.