Extending from bills stopped paying after the 2-year yield rose 26 basis points
The 2-year Treasury yield rose 26 basis points to 4.63% in the week ended Friday, September 11, after August core CPI; 20-year-plus Treasury funds lost 1.6%.
The Treasury base rate moved against anyone who left bills this week. Two-year yields rose 26 basis points from 4.37%, compressing the gap between 2-year and 10-year yields to 33 basis points from 51 basis points on August 14; from the September 4 close, the 30-year finished only 11 basis points higher, at 5.35%. Investment-grade credit offered 80 basis points over Treasuries and high yield 270 basis points. Most of the yield in those funds is the base rate that just rose. For much of late summer the long end had done the moving and the front end had eased. This week reversed that.
Producer prices on Thursday and consumer prices on Friday were the dated catalysts. The Bureau of Labor Statistics said August headline CPI rose 0.4% from July and 3.4% over 12 months. Core prices, excluding food and energy, rose 0.3% on the month and 2.4% over the year. Gasoline jumped 3.9% in August and accounted for more than a third of the monthly CPI increase; energy was up 2.1%, shelter 0.3%. Thursday's producer-price report had already shown final-demand prices up 0.4% on the month and 5.4% over 12 months, with energy up 4.2%. After the CPI print, CME FedWatch priced an 87% chance of a quarter-point increase at the September 15-16 FOMC meeting, up from 72% on Thursday.
A 26-basis-point rise at two years is a different invoice from 11 basis points at thirty, and the funds showed it.
Bond funds by maturity
The iShares 0-3 Month Treasury Bond ETF SGOV, a $108 billion fund of bills maturing inside three months, returned 0.05% from Friday, September 4, through Friday, September 11. The iShares 7-10 Year Treasury Bond ETF IEF lost 1.34% and closed at $91.01, 3 cents above its 52-week low.
Bills held; duration sold off into the inflation prints
- SGOV · 100.52
- IEF · 91.01
- TLT · 80.87
Losses lined up with maturity. The 1-3 year corporate fund SPSB finished within a hundredth of a percentage point of SHY: at the short end, credit was not the week's result.
Credit spreads barely moved
That is the same story further out the credit book. The ICE BofA U.S. Corporate Index option-adjusted spread was 80 basis points on Thursday, September 10, a basis point tighter than on September 4. The high-yield OAS was 270 basis points, 2 basis points wider than on September 4. Neither figure is a credit event.
HYG fell 0.71%. High yield's extra coupon did not produce a gain; its shorter duration produced a smaller loss than IEF. Short TIPS still have duration: the iShares 0-5 Year TIPS Bond ETF STIP lost 0.51%, because Friday's inflation print does not offset a 2-year that is repricing a hike. Municipal funds tracked the Treasury move this week, rather than a muni-specific gap.
Into next week's FOMC
The September 15-16 meeting now sits on a front end that has already moved. Extending from SGOV into IEF or TLT is the cost of owning duration when the base rate is what is moving, not extra yield collected because the curve is steep. Credit spreads that barely moved do not change that price.
Frequently asked
Why did longer-dated bond funds lose money this week?
The Treasury base rate rose, and losses lined up with maturity: bills returned 0.05% while 20-year-plus Treasuries lost 1.63%.
Did credit have anything to do with the losses?
No: investment-grade spreads were 80 basis points and high yield 270, both essentially unchanged on the week, so neither figure was a credit event.
What triggered the move?
Thursday's producer-price report and Friday's August CPI, after which futures priced an 87% chance of a quarter-point increase at the September FOMC meeting.
Did high yield's extra coupon help?
It did not produce a gain; high yield fell 0.71%, less than intermediate Treasuries only because its duration is shorter.