Why Treasury yields climbed and stocks rose to a new record

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Treasuries react to a recovering economy

Last week’s upbeat economic data resulted in higher Treasury yields. Yields from one year to 30 years rose on the better-than-expected data. 30-year Treasury yields rose the most, by 14 basis points to 3.23%. Ten-year Treasuries rose by 11 basis points to 2.46%.

An expanding economy usually raises inflation concerns. Higher inflation expectations tend to raise nominal yields on bonds. Also, in the present low-yields environment, better-than-expected economic growth raises worries that the Fed will bring forward its rates-tightening cycle. The Fed is widely expected to raise the Fed funds rate sometime in 2015.

Part 5

Bond prices and yields move in opposite directions. When bond yields rise, prices fall, and vice versa. So ETFs investing in Treasury securities experienced price declines.

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The Vanguard Total Bond Market ETF (BND) fell by 0.38% over the week ended September 5. BND holds debt in both Treasuries and corporate investment-grade bonds. The iShares Barclays 7-10 Year Treasury Bond Fund (IEF) declined by 0.82%, while the iShares Barclays 20+ Year Treasury Bond ETF (TLT) fell by 2.57%. TLT would experience greater price volatility in response to changing yields as it has holdings in longer-dated Treasuries.

But returns on inverse bond ETFs were positive. The ProShares Short 20+ Year Treasury ETF (TBF) rose by 2.61%, while the ProShares UltraShort 20+ Year Treasury ETF (TBT) rose by 5.18% over the week.

Major stock market indices were up over the week. The S&P 500 Index (SPY) (IVV) rose by 0.22% over the week to 2007.71 on Friday, a new record. Besides the positive economic data, the S&P 500 Index was also boosted by Russia and Ukraine calling a truce. A decline in geopolitical risk is generally bullish for stocks.

The next part will have a yields and returns analysis for high-grade bonds.

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