A 7- to 10-year Treasury fund rose more than the long-bond fund
The two-year yield fell 13 basis points and the 30-year fell 2, after the U.S. Federal Reserve held its policy rate.
Key takeaways
BlackRock's iShares 7-10 Year Treasury Bond ETF, IEF, rose 0.8% in price from Friday, Oct. 23, to Friday, Oct. 30. BlackRock's iShares 20+ Year Treasury Bond ETF, TLT, rose 0.6% in price. Yields fell from the two-year through the 10-year. The 30-year barely fell.
The two-year Treasury yield fell 13 basis points, to 4.56%. The five-year fell 11, to 4.71%. The 10-year fell 6, to 4.94%. The 30-year fell 2 basis points, to 5.31%. A basis point is 0.01 percentage point.
The 2-year yield fell to 4.56%; the 30-year ended at 5.31%
- 2-year · 4.6%
- 30-year · 5.3%
Share prices over that Friday-to-Friday stretch:
IEI matched TLT. Matching the long-bond fund did not require the long bond's duration. It required holding the maturities where yields fell.
iShares puts effective duration, the sensitivity of the share price to yields, at 4.2 years for IEI as of Oct. 26 and 6.8 years for IEF as of Oct. 27.
SHY rose 0.2%. Those Treasuries mature within three years, so the drop in the two-year yield did not lift the price much. iShares puts the fund's effective duration at 1.8 years as of Oct. 29.
TLT fell on Wednesday, when longer yields jumped, and recovered on Thursday and Friday. It holds Treasuries maturing in more than 20 years. The 30-year is only the longest bond in the fund.
IEF finished ahead after TLT dropped on Wednesday
- IEF · 100.78
- TLT · 100.61
The Federal Reserve held after raising in September
On Wednesday the U.S. Federal Reserve kept its target range for the federal funds rate, the overnight rate banks charge one another, at 3.75% to 4%. On Sept. 16 it had raised that range by a quarter of a percentage point, to the same level. This week's hold was a pause after that increase, not a turn.
The vote was 10-2. Governor Lisa D. Cook and Beth M. Hammack, president of the Federal Reserve Bank of Cleveland, preferred another quarter-point raise. The statement said inflation remains elevated, and that the goal is a return to 2%.
Wednesday split the curve. The 30-year yield had fallen 3 basis points on Monday and Tuesday, then rose 7, to 5.37%. The 10-year, down 1 basis point on Tuesday, rose 6, to 5.05%. The five-year rose 3, to 4.85%. The two-year, up 1 basis point from Oct. 23 to Tuesday, eased 3, to 4.67%.
CNBC reported that CME Group's FedWatch tool, which turns futures prices into the market's odds on the Fed's next move, put the chance of a quarter-point increase at the Dec. 9 meeting at 85.7% after the hold.
The decision came with a press conference from Chairman Kevin Warsh. Ali Hassan, a portfolio manager at Thornburg Investment Management, said markets appeared to see the decision and the press conference as "a softer policy path, not an inflation scare," CNBC reported.
"The market trimmed hikes further out: it still expects a December move but is less convinced of the follow-through."
Thursday's drop did the week's work
Thursday brought the week's biggest drop in the two-year and the 10-year. The two-year fell 6 basis points, the five-year fell 7, the 10-year fell 7, and the 30-year fell 5.
That morning the U.S. Bureau of Economic Analysis said the economy grew at a 3.4% annual rate in the third quarter, its advance estimate, up from 2.2% in the second. CNBC reported that economists had expected 3.1%. The same agency said the personal consumption expenditures price index rose 0.5% in September and 3.6% from a year earlier, up from 3.4% in August. CNBC said the monthly figure matched the Dow Jones consensus and the yearly figure was a tenth under the 3.7% that had been expected.
Growth beat the forecast, and inflation was still well above 2%. Yields fell anyway. The priced chance of a December increase fell too. CNBC put Thursday's FedWatch reading at more than 77%, down from 85.7% after Wednesday's decision.
Yields fell again on Friday. The two-year fell 5 basis points, the five-year fell 7, the 10-year fell 4, and the 30-year fell 1. The gap between the 10-year yield and the two-year widened to 38 basis points, from 31 on Oct. 23.
The two-year finished 56 basis points above the top of the Fed's range. On Friday, Alberto Musalem, president of the Federal Reserve Bank of St. Louis, said additional firming of monetary policy will be necessary, and soon. Lorie Logan, president of the Federal Reserve Bank of Dallas, said the committee still needed at least two quarter-point increases. CNBC reported that FedWatch still put a December increase at roughly 76%.
"Skipping a meeting does not change the monetary policy destination," Logan said.
Corporate bonds missed Thursday's rally
The extra yield that high-yield bonds pay over Treasuries, on the ICE BofA index of those bonds, narrowed by 12 basis points from Oct. 23 to Oct. 29, to 326 basis points. It was tightest on Wednesday, at 314, the day of the decision, then widened by 12 basis points on Thursday. The investment-grade spread on ICE BofA's corporate index narrowed by 2 basis points over those same days, to 89 basis points, after touching 86 on Wednesday and widening on Thursday.
BlackRock's iShares iBoxx $ High Yield Corporate Bond ETF, HYG, rose 0.5% on the week. The gain was in by Tuesday, and the fund finished Friday below Wednesday's close. BlackRock's iShares iBoxx $ Investment Grade Corporate Bond ETF, LQD, rose 0.4%. Its price peaked on Tuesday too.
The corporate funds did not match the Treasury rally on Thursday and Friday. On Thursday, Treasury yields fell and the extra yield those bonds pay over Treasuries widened. iShares put LQD's effective duration at 7.6 years as of Oct. 27, next to 6.8 years for IEF that same day. LQD was at least as sensitive to yields, and it still finished behind IEF.
BlackRock's iShares Core U.S. Aggregate Bond ETF, AGG, rose 0.4%. It holds mortgages and corporate bonds as well as Treasuries, and it lagged the intermediate Treasury funds.
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