Last week’s Treasury bond market update
Against market expectations, yields across the curve dropped considerably last week, leading to a rally in bond market prices that benefitted all major bond ETFs, including the Vanguard Total Bond Market ETF (BND), iShares 20+ Year Treasury Bond (TLT), and iShares 7-10 Year Treasury Bond (IEF). On May 15, yields were at their lowest since October of last year. Mixed economic data was the primary reason for the fall in yields.
While housing starts, a measure of construction activity, rose 13% in April over the same period in 2013, the rise was driven primarily by a jump in multi-family apartment buildings. Single-family housing starts rose by just 1% over the same period. This means people are still not comfortable building a house and prefer renting instead. This argument is supported by the fact that the housing ownership rate was down to 64.8% at the end of April from 69.2% in 2004. Building permits, which later translate into housing starts, are down more than 3% in April over the same period in 2013. This means housing starts for single-family homes may not strengthen in the near future.
People invest in capital-intensive assets such as houses and cars when they’re confident about the economy and their own future. The dismal performance of housing starts and building permits for single-family homes suggests people are still holding back from investing in houses. The Fed has kept interest rates low to boost consumption and the real estate sector. Since the real estate sector hasn’t fully recovered—as we’ve seen in the dismal single-family housing starts and building permits—the stimulus is expected to continue for a while. This has caused yields to fall.
The situation in Ukraine also remains strained as Ukrainian forces continue to fight insurgents in the eastern part of the country. To add to that tension, China sent ships to Vietnam to rescue Chinese workers after protests and riots against China’s plan to set up an oil rig in disputed waters near Vietnam’s shore. The conflicts in Ukraine and Vietnam have also caused a flight-to-safety, resulting in Treasury yields dropping.
The European Central Bank (or ECB) is expected to provide stimulus by lowering already low interest rates to speed up the recovery in Euro-zone economies.