Last week, June 6–13, we saw yield increases for all coupon-bearing Treasury maturities except for 20- and 30-year maturities. Ten-year Treasury (VGIT) yields were unchanged at 2.60% by the end of last week compared to the previous week. Short-term Treasuries (SHY) and intermediate-term Treasury (IEF) maturities were largely impacted by rate expectations, while demand factors proved a more dominant driver for long-term Treasury (TLT) yields.
External demand considerations
Going forward, demand should also remain a key driver for longer-term Treasury debt due to escalating tensions in Iraq as well as comparatively lower yields for sovereign debt issued by foreign governments in countries perceived as safe havens, like Japan, Germany, and some countries in the European Union (or EU).
Economic woes and the prospect of monetary tightening in the EU have already lowered yields on sovereign debt in many European countries to levels below comparative U.S. Treasuries. The last factor is likely to make U.S. Treasuries more attractive as an asset class compared to the government debt of other “safe-haven” countries, as yield comparisons are more favorable. This would exert downward pressure on yields and increase bond prices, all else constant.
However, an event akin to the “taper tantrum” we saw in May 2013 could reverse this trend. It would all boil down to the nature of forward guidance provided by the Fed at the June and future FOMC meetings and market expectations with reference to the guidance provided.
To read more about what investors can expect from the June FOMC, please see the Market Realist article Investors prepare for the Federal Open Market Committee meeting.