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Yields increased on long-dated Treasuries

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Yields increased

Yields on US Treasuries mainly increased in the week ending December 26. Only the short end of the yield curve saw flat to falling movement in yields in the week. The rise was restricted to single digits. Three, five, and seven-year maturities increased by nine basis points. The benchmark ten-year Treasury yield increased by eight basis points.

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Economic growth responsible

The main reason for the rise in yields was GDP (gross domestic product) growth. It grew quicker than expected. The 5% rise in GDP in the third quarter outpaced the earlier reported rise of 3.9%. A positive report for the economy is negative for Treasuries. It fuels the risk-on sentiment. In contrast, equity ETFs—like the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV)—reacted positively to the data.

An additional fall was averted because Treasuries remain in favor due to higher yields—compared to other developed nation’s bonds. Low inflation is also helping Treasuries. The Federal Reserve already said that it would be “patient” in raising the federal funds rate. An increase in the rate would make yields move higher. As a result, prices will move lower. Yields and prices are inversely related.

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Positive performance

Treasuries beyond the five-year maturity have done very well this year. The ten-year note traded at a yield level that was 75 basis points lower than last year. The 20-year security’s yield is down 114 basis points—compared to last year. In the past year to December 26, the iShares Barclays 20+ Year Treasury Bond Fund (TLT) returned over 25%—even after it posted negative returns for the week.

The iShares Barclays 7-10 Year Treasury Bond Fund (IEF) returned a much lower ~8% year-to-date, or YTD. The iShares Barclays 1-3 Year Treasury Bond Fund (SHY) remained marginally positive with ~0.3% returns in the same period.

Primary market

The primary market was alive with activity. The Treasury Department sold $104 billion of securities in the week ending December 26. In this series, we’ll look at all of these auctions in more detail.

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