Why asset classes reacted differently to September’s FOMC



Impact of the Fed’s September FOMC

The Fed held its sixth Federal Open Market Committee (or FOMC) meeting on September 16–17. Due to improving economic data, the Fed’s guidance, at the end of the September FOMC, was expected to signal a faster and higher path of rates increases. In anticipation of the Fed’s statement, junk bond yields increased mid-week to 6.04% on September 16.

Part 4

Market expectations were justified to an extent. The Fed’s “dot-plot” signaled a slightly higher and earlier pace of rate increases—compared to the earlier projections released in June. You can read the full analysis of the FOMC in the Market Realist series, “Must-know: Key investor takeaways from the Fed’s September FOMC.”

Treasury yields between two-year and 30-year maturities increased on September 17. The prices of the iShares 20+ Year Treasury Bond (TLT) fell by 0.26% on September 17. This was due to the higher path of the Fed’s “dot-plot.”

Timing of rate increases

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The Fed’s forward guidance also indicated the continuation of an accommodative policy for a “considerable time” after asset purchases ended—probably by year-end 2014. This implied that rate hikes weren’t as close as markets had anticipated. As a result, volatility was lower. The iPath S&P 500 VIX ST Futures ETN (VXX) fell by 0.25% on the Fed’s guidance for continued monetary accommodation. Major equity exchange-traded funds (or ETFs) like the SPDR S&P 500 (SPY) and the PowerShares QQQ (QQQ), increased by 0.14% and 0.15%, respectively, on September 17.

High-yield bond spreads narrowed by five basis points (or bps) on September 17 to 4.05%. This was on the guidance for continued monetary accommodation. Junk bond yields declined two bps to 6.02%. The SPDR Barclays High Yield Bond (JNK) and the iShares iBoxx $ High Yield Corporate Bond ETF (or HYG) increased by 0.14% and 0.15%, respectively. High-yield bond markets may have oversold ahead of the September FOMC statement. This probably accounted for the decline in yields after the statement was released.

Recent trends in investor outflows from high-yield mutual funds suggest that investors are cautious. You’ll read more about investor flows and other secondary market trends in the next part of the series.


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