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How Have Treasuries Fared since the Fed’s March Policy Statement?

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Short-maturity securities

Short-maturity Treasury notes are closely related to a change in interest rates. This is because the federal funds rate itself is a short-term interest rate. Hence, a change or an expectation of a change in the policy rate directly and immediately impacts short-maturity Treasury notes.

In the lead-up to the March policy statement, the yield on the two-year Treasury note had risen. It began March at 0.85% and rose to 0.98% at the end of trade in the secondary market on March 15, a day before the policy release. It fell sharply by 11 basis points the next day. Since then, the yield on the note has firmed up to 0.89%, as of March 24, but this is still 9 basis points below the March 15 level.

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Intermediate-maturity securities

The yield on the seven-year Treasury note closed at 1.78% on March 15. At the end of trade the next day, the yield on the note fell 6 basis points, showing a milder fall than seen in the two-year note. The yield on the note has remained below the March 16 level for all days except one since then. On March 24, the yield on the seven-year note stood 8 basis points below the March 15 level.

Meanwhile, the yield on the benchmark ten-year note stood at 1.97% on March 15. The next day, it fell just 3 basis points. On March 24, the yield on the ten-year note was 6 basis points below the March 15 level.

Long-maturity securities

Long-maturity securities are affected more by expectations regarding inflation than they are by a change in interest rates. Remember that interest rates are raised to combat inflationary pressures in an economy. Hence, long-maturity papers are indirectly impacted by an expectation of a change in interest rates.

The yield on the 30-year bond stood at 2.73% on March 15. A day later, after the March policy statement, it remained unmoved. On March 24, the yield on the bond was 6 basis points below the March 15 level.

Interpretation

The yield movement at the short end of the yield curve (OPGVX) indicates a reduction in the pressure that had built up ahead of the FOMC (Federal Open Market Committee) meeting. But as we go along the curve, we see that yields on longer-maturity papers (PRULX) have reacted mildly, displaying their comparative immunity to the March policy statement. Among equities, insurers (AON) (FAF) (MMC) have generally been trading higher since the policy was announced.

Investors, especially income investors, need not abandon medium- to long-maturity bonds and mutual funds, given that the pace of the rate hike has been reduced. However, they need to keep an eye out for inflation, especially since it has risen sharply in the last two months.

In the next part of this series, we’ll move on to investment-grade corporate bonds.

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