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Treasury yields continued to move downhill

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Secondary market

Treasury yields continued their downward trajectory in the week ending January 16, 2015. In the two to 30-year segment, the fall in yields was in the 10–16 basis points, or bps, range. The benchmark ten-year Treasury notes, or T-notes, ended the week at a 1.83% yield. It was down 15 bps from a week ago. Its yield was down 103 bps—from the level last year.

Meanwhile, the yield on 30-year Treasury bonds, or T-bonds, was down 133 bps—compared to the level last year.

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Mixed indicators

Consumer price index, or CPI, inflation data helped yields fall. Inflation fell by 0.4% month-over-month. In December 2014, it fell for the second month in a row. This led to expectations that the Federal Reserve may not increase the federal funds rate soon. A rise in the rate would make Treasuries unattractive because yields will also rise.

Since prices are inversely related to yields, they will drop. This will affect ETFs—like the iShares Barclays 20+ Year Treasury Bond Fund (TLT), the iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and the iShares Barclays 1-3 Year Treasury Bond Fund (SHY).

ETFs that invest across the bond market—like the Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG)—are also affected. They invest in T-notes and T-bonds.

Apart from inflation, advance retail sales and industrial production data also disappointed. However, strong indicators—like an 11-year high Consumer Confidence Index by Thomson Reuters/University of Michigan—stopped the falling yields. We’ll look at all of these indicators in more detail in Part 6 in this series.

Swiss National Bank’s decision

A major factor that drove yields down was the Swiss National Bank’s surprise decision to end its three-year cap of 1.20 franc per euro. It also reduced a benchmark interest rate from -0.25% to -0.75%. The changes were announced on January 15, 2015.

Before we discuss the auctions for T-bonds and T-notes last week, let’s look at the yield on 30-year T-bonds. We’ll discuss why it can’t find solid ground.

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