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Bond Yields Rise as the Chinese Government Cuts Interest Rates

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The basis for long-term interest rates

Ten-year bond yields influence everything from mortgage rates to corporate debt. They’re now the benchmark for long-term US interest rates.

Some of you might remember when the 30-year bond was the benchmark, but that changed in the 1990s. When investors want to know what’s going on in the bond market, in essence they want to know where the ten-year bond is trading.

Note that short-term rates are still important, particularly the LIBOR (IntercontinentalExchange London Interbank Offered Rate), which is the base rate for almost all short-term rates.

Rate information is relevant to REITs such as American Capital Agency (AGNC), Annaly Capital Management (NLY), Redwood Trust (RWT), and MFA Financial (MFA). Investors can trade in the REIT sector through the iShares Mortgage Real Estate Capped ETF (REM).

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Bond yields rose slightly, but volatility is falling

After closing out the prior week at 2.03%, bond yields, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), rose by 5 basis points for the week ending October 23 to go out at 2.08%. Bonds had traded in a tight range until Thursday night when the Chinese cut rates. This put a risk-on feel in the market as stocks rose and bonds sold off.

Markets decreasing bets on a December hike

Federal funds futures contracts can be used to estimate the probability of a rate hike in December. The current probability is around 40%. The market was surprised by how dovish the FOMC (Federal Open Market Committee) statement was following the last meeting. The minutes showed the Fed was focused on international concerns, which probably won’t change dramatically in the short term.

The only reason not to raise rates is that inflation remains well below the target level. Last week, the CPI (consumer price index) and the PPI (producer price index) showed very little inflation in the markets.

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