Why short-term Treasuries caused the yield curve to buck trend

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Treasury yield movements in the week ending October 10

Usually, investment-grade bond (or BND) yields fall when economic data is negative. This increases bond prices. Bond yields also tend to fall when geopolitical and event risks run high. In contrast, stock prices fall when economic data is negative and market risks increase.

Part 8

Impact of the Fed’s minutes

Treasury yields between one-year and 30-year maturities, declined between one and 18 basis points (or bps) over the week. The biggest decline came about in the five-year maturity. It declined by 18 bps. It came in at 1.55% on October 10. The economically-sensitive ten-year (IEF) and 30-year Treasury (TLT) yields declined by 14 and ten bps. They came in at 2.31% and 3.03%, respectively, on October 10.

Yield curve steepens

The difference between five-year and 30-year Treasury yields widened to 1.48% on October 10—from 1.4% on October 3. Unlike the recent trend, the decline in yields at the short-end of the curve was higher that the decline at the long-end of the curve.

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Markets had been expecting a more hawkish slant to the Fed’s minutes. The cited growth concerns meant that rates would stay low for a longer period than initially projected. As a result, short-term rates dipped more than those at the long-end of the curve. Short-term rates are more sensitive to changes in the base rate.

Stock market volatility

On Wednesday, major U.S. stock indices increased sharply on the Fed’s dovish slant. However, stocks moved into the red again on Thursday. They were down for the week ending October 10.

Corporate borrowers and financial markets benefited from rates staying lower for a longer period. However, markets fell due to concerns on global growth, particularly in the Eurozone. This affected returns on exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ (QQQ). They fell by 3% and 3.8%, respectively, over the week.

Volatility increased sharply. The VIX (VXX) increased 46% to 21.24 in the week ending October 10. This was the highest level since February 3, 2014.

In the next part of the series, we’ll discuss the impact of the above on corporate investment-grade bond yields and other secondary market activity.

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