The 10-year yield fell, and long Treasury funds gained more than short ones

The 10-year Treasury yield ended Friday, Nov. 6, at 4.86%, down 8 basis points from 4.94% on Oct. 30. All of the week's decline was in by Thursday, when the yield closed at 4.84%, 10 basis points under the Oct. 30 close. Friday's jobs report gave 2 basis points back.

West Texas Intermediate crude, the U.S. benchmark, settled at $90.83 a barrel on Friday, down 12.8% from $104.12 on Oct. 30. Bloomberg reported that the drop in oil, and a decline in shares of large technology companies after this week's U.S. midterm elections, fueled the Treasury gains that the jobs report then pared.

The rally did not touch the yield an investor locks in after inflation. Through Thursday, when the drop in the ordinary 10-year yield was fully in, the 10-year inflation-protected yield was 2.60%, the same as on Oct. 30. The ordinary 10-year yield had fallen to 4.84%.

The gap between those two yields measures expected inflation over the next ten years, and it fell to 2.24% on Thursday from 2.34% on Oct. 30. The ordinary yield's entire 10-basis-point decline was in that gap.

A fund holding the inflation-protected bonds does not gain when the gap narrows and the protected yield does not fall. The iShares TIPS Bond ETF TIP lost 0.2% on the week, even after the cash it paid out.

Friday's jobs report

Employers added 165,000 jobs in October, the Bureau of Labor Statistics said. Economists surveyed by The Wall Street Journal had expected 59,000. The average monthly gain over the prior 12 months was 48,000.

The unemployment rate was 4.1%, from 4.2% in September. Revisions added 84,000 jobs to August and September combined.

On Friday the 10-year yield rose 2 basis points, to 4.86%. The 2-year yield rose 5 basis points, to 4.51%, and the 30-year yield rose 1 basis point, to 5.26%.

The Federal Reserve raised the federal funds target range by a quarter point on Sept. 16, to 3.75% to 4%, and said inflation remains elevated. On Oct. 28 it left the range there, by a 10-2 vote. Federal Reserve Governor Lisa D. Cook and Cleveland Fed President Beth M. Hammack voted against the hold and preferred another quarter-point increase.

The 3-month yield, the one closest to the rate the Fed sets, rose 3 basis points on the week, to 4.19%. The decline was not in the yield nearest the policy rate.

The 2-year yield is where a change in the federal funds rate over the Fed's next few meetings shows up first, and the odds of a change rose on Friday. The Wall Street Journal reported that CME's FedWatch tool put the chance of a quarter-point increase at the Dec. 8-9 meeting at about 78% on Friday, from 67% a day earlier.

What bond funds returned

These returns run from the Oct. 30 close to the Nov. 6 close and include the cash the funds paid out this week, not reinvested. The Vanguard Extended Duration Treasury ETF EDV paid no cash this week.

A basis point at a long maturity changes the price more than a basis point at a short maturity, because the cash comes back later. The 2-year yield and the 30-year yield each fell 5 basis points on the week. Counting the cash paid out, the same basis as the table, SHY gained 0.2% and EDV gained 0.7%.

The share price of SHY fell because a cash payout set on Nov. 2 left the price, not because the 2-year yield rose. The payout more than made up for the drop. EDV paid nothing, so its 0.7% was the price.

The 10-year yield fell 8 basis points, more than the 30-year, and IEF still gained 0.4%. A fund of Treasuries maturing in seven to ten years moves less, for each basis point, than a fund of bonds maturing in 20 years or more, so the larger yield move did not produce the larger gain.

AGG and LQD each gained 0.6%. The extra yield on the ICE BofA investment-grade corporate index over Treasuries was 93 basis points on Thursday, 1 basis point tighter than on Oct. 30, too small a move to account for the gain.

High-yield credit moved the other way. The extra yield on the ICE BofA high-yield index over Treasuries widened to 348 basis points on Thursday from 344 on Oct. 30, after jumping 16 basis points on Thursday from 332 on Wednesday. The share price of HYG fell because a cash payout set on Nov. 2 left the price. The payout more than covered the drop, and the holding return was 0.3%.