uploads///US Treasuries Yield Curve

A ‘Patient’ Exit Trips Up Treasury Yields



The secondary market

Yields on U.S. Treasuries fell nearly across the curve in the week ended March 20, 2015. This was driven primarily by the FOMC’s (Federal Open Market Committee’s) monetary policy statement delivered on March 18.

The fall was in the range of 8–20 bps (basis points) in the two-year to 30-year maturity securities. The seven-year, ten-year, and 30-year securities saw yields falling by 20 bps each over the week. Yield on the benchmark ten-year note ended at 1.93%.

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Yellen & Co. drives yields down

The FOMC’s decision to drop “patience” from its forward policy guidance after the scheduled March 17–18 meeting was a largely expected move. Usually, it would have signaled an impending rate hike. Although dropping “patience” did open the theoretical possibility of a rate hike in June 2015, it was the largely dovish stance that led to plummeting yields.

It began with Fed Chair Janet Yellen, who said in a press conference, “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.” The FOMC also dialed down its forecast for economic growth and PCE (personal consumption expenditures) inflation, the Fed’s preferred measure of price rise. Its SEP (summary of economic projections), which is released four times a year, also showed that although most policymakers prefer a rate hike sometime in 2015, they expect its pace to be more gradual than projected in the December 2014 SEP.

You can read more about the FOMC meeting outcome and implications in our series The Fed’s ‘Patience’ is Gone, but Will Things Change from Here?

Investment impact

The fall in Treasury yields across most maturities led to a rise in associated ETFs, as prices and yields are inversely related. The iShares Barclays 20+ Year Treasury Bond Fund (TLT) rose the most, up 3.8% for the week, while the iShares Barclays 7–10 Year Treasury Bond Fund (IEF) rose 1.6%. ETFs tracking the broader fixed income market also ended up. The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) rose 0.9% each in the week.

The US dollar plummeted on the release of the monetary policy statement. This drove down the PowerShares DB US Dollar Index Bullish Fund (UUP) 2.0% on March 18 from a day before.

A fall in the dollar led to a recovery in crude oil prices for the day. This led to a rise in energy-related stocks such as Chevron Corporation (CVX), ConocoPhillips (COP), and Exxon Mobil (XOM), which emerged among the biggest gainers of the day, up 3.4%, 2.6%, and 2.4%, respectively.

In primary market activity, the U.S. Treasury auctioned $13 billion worth of ten-year Treasury Inflation-Protected Securities (or TIPS). We’ll look at this auction in detail in the next article.


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