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Why Treasury yields increased

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Updated

Secondary market

Yields on US Treasuries increased across the curve in the week ending December 19. They were mainly affected by the FOMC’s (Federal Open Market Committee) statement. The FOMC decided to be patient. The biggest increase was seen in the two-year to seven-year segment. Yields increased by double digits. The yields for the benchmark ten-year Treasury notes, or T-notes, increased by seven basis points from a week ago. It ended at 2.17%.

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Patient stance

The FOMC’s “patient” stance on raising the federal funds rate boosted a risk-on sentiment. This fueled a rise in equities and related ETFs—like the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV).

As a result, yields on Treasuries increased. This led to a fall in ETFs investing in Treasuries. The relationship between yields and prices is inverse. A rise in yields means a fall in prices. ETFs—like the iShares Barclays 20 Year Treasury Bond Fund (TLT), the iShares Barclays 1-3 Year Treasury Bond Fund (SHY), and the iShares Barclays 7-10 Year Treasury Bond Fund (IEF)—fell in the range of 0.2%–0.7% in the week ending December 19.

A recovery on the last working day of the week, on a renewed demand for Treasuries, wasn’t enough to reverse the losses caused after the FOMC announcement.

Treasury yields also increased because November’s industrial production grew the fastest since May 2010. Positive news for the economy is usually negative for the fixed-income market.

We’ll discuss the major economic releases last week in Parts 3–6 of this series.

Primary market

The primary market didn’t see much activity in the week because no major notes or bonds were up for auction. Treasury bills, or T-bills, worth $90 billion were auctioned in the week. However, the week did see the auction of five-year TIPS (Treasury Inflation-Protected Securities). We’ll discuss this in the next part of this series.

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