Why US Treasuries struggle with the FOMC and GDP growth


Nov. 26 2019, Updated 9:39 p.m. ET

Comparing Treasury performances and stock market ETFs 

Treasury markets have been a buffer for global investors in 2014. Concerns over international growth and geopolitical risks have seen long-term Treasuries benefit significantly.

Exchange-traded funds (or ETFs)—like the iShares 20+ Year Treasury Bond ETF (TLT) and the iShares 7-10 Year Treasury Bond (or IEF)—appreciated by almost 20% and 7.5%, respectively, year-to-date (or YT)—through October 31.

Despite numerous stock market all-time highs this year, the performance has been favorable compared to equities. The SPDR S&P 500 ETF (SPY) and the iShares Russell 2000 ETF (IWM) increased by 10.7% and 2%, respectively, during the same period.

Emerging market equities—as represented by the iShares MSCI Emerging Markets ETF (EEM)—are up by 1.6%.

Impact of the Fed’s monetary policy

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The Fed maintained ccommodative monetary conditions in 2014. This also helped the performance of Treasuries and real estate ETFs like the iShares US Real Estate ETF (IYR). At last week’s Federal Open Market Committee (or FOMC) meeting, the Fed announced the end of its Large-Scale Asset Purchase (or LSAPs) program—or the third round of quantitative easing (or QE3).

The program ended in September 2012. It consisted of monthly purchases of longer-term Treasuries and agency-backed securities. The program lowered interest rates in the bond market. It intended to make credit conditions more favorable for businesses and households. As an unintended by-product, the program also diverted liquidity into U.S. and international equity (EEM) markets. Read more about the FOMC in “October’s FOMC meeting marks the end of the Fed’s asset purchases.”

This brings an end to an unprecedented era of monetary stimulus. In this weekly update, you’ll read about how removing the stimulus measures affected Treasury securities auctions. The auctions were held last week. You’ll also read about how this will influence the outlook for U.S. Treasury yields in Part 9 in this series.

U.S. economic releases and the GDP surprise

Last week, some important economic indicators were released. The advance estimate for 3Q14 gross domestic product (or GDP) was released by the Bureau of Economic Analysis (or BEA). The report surprised markets on the upside. We’ll discuss this in Part 7.

We’ll also cover other major indicators—including those related to inflation, housing, manufacturing, and the labor market. These can significantly impact returns on fixed income and stock market investments.

In the next part of the series, we’ll discuss last week’s two-year Treasury notes (or T-notes) auction.


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