Why US Treasuries saw pendulum shifts after the Fed’s FOMC

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U.S. Treasuries saw pendulum shifts after the FOMC

Last week was eventful in more ways than one. U.S. Treasury securities, considered some of the safest assets in the world, were impacted as both domestic and overseas events resulted in some pendulum shifts in yields.

Part 1

In a roller-coaster week, Treasury yields were influenced by some major events:

  • The 2Q14 gross domestic product (or GDP) advance estimate released on Wednesday, July 30
  • The Fed released its press statement after its July Federal Open Market Committee (or FOMC)
  • The economic reports released on Friday, August 1
  • The broad sell-off in stock markets (IVV) around the world were spooked by Argentina’s sovereign debt default and Portugal’s banking stress
  • There were geopolitical crises around the world including Gaza, Russia-Ukraine, and Iraq.

While the first two events resulted in rising Treasury yields, the last three events saw investors take refuge in U.S. Treasury assets, which caused yields to fall and prices to increase.

Wednesday was a market-moving day for Treasuries

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The biggest move in yields came last Wednesday, with the release of the 2Q14 GDP data and the press statement from the Fed’s July FOMC meeting. GDP grew 4% quarter-over-quarter (or QoQ) at a seasonally-adjusted annual rate in 2Q14, coming in higher than markets expected. The decline in 1Q14 GDP was also revised to 2.1% from 2.9%.

The Fed’s post-FOMC statement also pointed at improvements in the economy. Significantly, it said that the risk of inflation coming in at less than 2% had reduced somewhat. Since inflation had been falling persistently short of the Fed’s mandate of 2%, this was construed as a slightly hawkish statement by the Fed.

Improved economic prospects and higher inflation expectations generally cause an increase in yields, which lowers bond prices. Last Wednesday was no exception to this rule. Long-term Treasury yields (UST) increased, with seven and ten-year yields (IEF) rising the most, by ten basis points on July 30, followed by 30-year Treasury yields (TLT) which increased by nine basis points.

However, since these were bullish indicators for the economy, the main stock market indices were higher with the NASDAQ-100 (QQQ) and the S&P 500 Index (IVV) gaining 0.43% and 0.01%, respectively, on Wednesday.

In the next section, you’ll read about other secondary market trends that caused Treasury yields to decline in a significant turn in sentiment. You’ll also read about the U.S. Treasury’s auction of $199 billion worth of both coupon-paying and non-coupon paying debt securities in the primary market.

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