Bonds rally on the slightly bullish FOMC minutes



FOMC minutes from December 2014

When the Fed meets for its Federal Open Market Committee (or FOMC) meeting, it usually puts out a press release that hits the decision highlights. The Fed also gives a brief economic overview and sometimes hosts a press conference.

Analysts usually compare the current statement with the previous one, noting any changes in language. The FOMC meeting minutes are much more in-depth. They’re usually ten to 20 pages long. The minutes include graphs and a two-sided discussion about the argument.

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The FOMC minutes go deeper than the FOMC statement and explain the current discussions. Commercial REITs such as Simon Property Group (SPG), Boston Properties (BXP), Kilroy Realty (KRC), Vornado Realty (VNO), and SL Green Realty (SLG) are sensitive to interest rates, especially short-term rates, which the Fed controls directly. REITs are highly active in the fixed income markets and are always looking for the most efficient way to finance their balance sheets.

Bonds react to the minutes

As the above chart highlights, global economic weakness has caused bonds (TLT) to rally for the past few weeks, culminating in a huge spike over the last few days. U.S. Treasuries have largely been at the mercy of European Sovereign bonds, which are rallying due to a flight to quality trade as yields on Greek debt blow out, and due to the prospect of QE (quantitative easing) on behalf of the ECB (European Central Bank). This activity probably dampened the effect of the FOMC minutes. The day the Fed released the FOMC minutes began with the ten-year bond yielding 1.98%. Bonds rallied on the minutes, touching as low as 1.93% before selling off and finishing the day with a modest rally.

This series will take an in-depth look at the October FOMC minutes and their implications for investors.


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