TLT fell 3.1% as the 30-year yield rose 21 basis points
Bonds with decades left fell harder, even though their yields rose less.
Key takeaways
The 30-year U.S. Treasury yield rose 21 basis points from Nov. 6 to Friday, Nov. 13, to 5.47%, on the Treasury's daily yield curve. Over those same days, the share price of iShares 20+ Year Treasury Bond ETF TLT fell 3.1%.
The 2-year yield rose 37 basis points, to 4.88%. The 10-year rose 29 basis points, to 5.15%. Both rose more than the 30-year, and the long fund still fell the most.
The 2-year yield rose 37 bp, more than the 30-year
- 2-year · 4.88
- 10-year · 5.15
- 30-year · 5.47
A basis point is a hundredth of a percentage point, so the 30-year's rise is 0.21 percentage points. Duration, measured in years, is a rough count of how many percent the price falls for each percentage point the yield rises.
iShares reported an effective duration of 14.8 years for TLT as of Nov. 10. Against that 0.21 percentage point rise, that is a drop of about 3.1%, which is what the shares did.
The same check holds further down the curve. iShares 7-10 Year Treasury Bond ETF IEF had an effective duration of 6.8 years as of Nov. 12. Against the 10-year's rise of 0.29 percentage points, that is a drop of about 2.0%, and the shares fell 2.0%.
iShares 1-3 Year Treasury Bond ETF SHY had a duration of 1.8 years as of Nov. 10. With under two years left, it had much less price to give up, and the shares fell 0.6%.
The share-price changes run from the Nov. 6 close to Friday.
Durations are iShares' effective duration, as of Nov. 10 for TLT and SHY and Nov. 12 for IEF.
The broad funds fell less than TLT and more than SHY. iShares Core U.S. Aggregate Bond ETF AGG fell 1.5%. Vanguard Total Bond Market ETF BND fell 1.4%.
October inflation and a December hike
Tuesday was the 2-year yield's largest one-day rise of the week, 17 basis points. The U.S. Bureau of Labor Statistics said consumer prices rose 0.4% in October. Core prices, excluding food and energy, rose 0.3%. CNBC reported a forecast of 0.2% for that core reading, and attributed the day's jump in Treasury yields to the hotter number.
The U.S. Federal Reserve's target range for the federal funds rate is still 3.75% to 4%, where the Fed left it on Oct. 28. Federal Reserve Governor Christopher Waller had spoken Tuesday morning, before the inflation report. He was already leaning toward a 25 basis point increase at the December meeting, even if October inflation improved. A core reading around 0.3% or higher, he said, would mean considering a 50 basis point increase instead.
"In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting," Waller said. "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take."
That 0.3% reading was the threshold he set for considering the larger move.
Credit spreads narrowed
A corporate bond's yield is a Treasury yield plus a spread, the extra yield for taking credit risk. Those spreads narrowed, so corporate yields rose by less than Treasury yields. That is the cushion.
Through Nov. 12, the ICE BofA U.S. High Yield Index option-adjusted spread, that extra yield, narrowed 22 basis points, to 3.20%, from 3.42% on Nov. 6. The investment-grade corporate spread narrowed 4 basis points, to 0.89%, from 0.93%.
iShares iBoxx $ Investment Grade Corporate Bond ETF LQD fell 1.6%. iShares put its effective duration at 7.6 years as of Nov. 12, longer than IEF. It fell less than IEF anyway, because the narrower spread meant its yield rose by less than a Treasury yield of similar length.
iShares Broad USD High Yield Corporate Bond ETF USHY fell 0.4%. Its effective duration was 3.1 years as of Nov. 12, longer than SHY, and it fell less than SHY. The high-yield spread narrowed by 22 basis points, a much larger cushion than investment grade got.
Inflation-protected and municipal bonds
From Nov. 6 to Nov. 12, the 10-year inflation-protected yield rose 23 basis points, to 2.86%, on the Fed's daily interest-rate release. The 10-year breakeven inflation rate, which the Federal Reserve Bank of St. Louis describes as a measure of expected inflation over the next 10 years, was 2.24% on Nov. 12, against 2.23% on Nov. 6. It barely changed.
iShares TIPS Bond ETF TIP fell 1.6%. iShares 0-5 Year TIPS Bond ETF STIP fell 0.5%. A higher inflation-protected yield cuts the price the same way a higher ordinary yield does, and the longer fund fell more.
The interest on municipal bonds is exempt from federal income tax. The exemption applies to the interest, not the price. iShares National Muni Bond ETF MUB fell 1.3%. Vanguard Tax-Exempt Bond ETF VTEB fell 1.2%.
Bills and floating-rate funds
iShares 0-3 Month Treasury Bond ETF SGOV rose 0.07%. It holds Treasury bills maturing in three months or less. Those come due so soon that a rise in yields has almost no time to cut the price.
iShares Floating Rate Bond ETF FLOT rose 0.1%. It holds investment-grade notes whose interest payments reset as short-term rates move.
Invesco Senior Loan ETF BKLN rose 0.2%. Its summary prospectus says the fund invests in senior loans that pay a floating rate and reset periodically.
TLT fell 3.1%; bills and floating-rate funds rose
Fixed coupons with many years left took the loss, and the longest took the most. Narrower credit spreads softened it for corporate funds. Bills and floating-rate funds, whose payments come due or reset soon, held their prices.
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