Analyzing Treasury yields ahead of the Fed’s September 2014 FOMC

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Treasury yield movements in the week ended September 12

Markets chose to treat the less-than-satisfactory labor market data as a blip. Job creation had been very strong in 2014. Total non-farm payrolls had crossed pre-recession levels.

Janet Yellen’s labor market view

Fed Chair Janet Yellen spoke on the improving labor market in a recent speech at Jackson Hole, Wyoming. She also indicated that an increase in the Fed funds rate could come in earlier than anticipated on a faster convergence on the Fed’s inflation and employment goals.

You can read about the highlights of her speech and its implications for ETFs here.

Yield curve impact

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Economic growth, along with demand-side headwinds from an improving labor market, usually raise inflation concerns. Higher inflation expectations tend to raise nominal yields on bonds, especially at the long end of the curve. Also, an earlier-than-anticipated rate rise would tend to raise bond yields.

Further, financial markets were apprehensive of a possible hawkish Fed statement at the end of the September Federal Open Market Committee (or FOMC) meeting. The Fed’s FOMC has important implications for financial markets. You can read more about this in Part 14.

Due to these factors, Treasury yields between one-year and 30-year securities rose. Ten-year yields rose the most, by 16 basis points (or bps) over the week to 2.62%. Thirty-year yields were up by 12 bps, to end the week at 3.35%. Volatility was also higher, driven by uncertainty. The VIX (VXX) rose over 10% to end the week at 13.31.

Investor impact

Bond prices tend to fall when yields rise. The prices of bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT), the ProShares Ultra 7-10 Year Treasury ETF (UST), and the iShares 7-10 Year Treasury Bond ETF (IEF) fell by 2.03%, 2.09%, and 1.09%, respectively, over the week. But returns on inverse bond ETFs were positive. The ProShares UltraShort 20+ Year Treasury (TBT) rose by 4.05%.

The next part of this series will discuss the impact of the Treasury yield on the corporate investment-grade bond market. You’ll also read about other secondary market trends.

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