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Yellen Comments Trigger Treasury Bond Selloff

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The biggest one-day treasury bond selloff in months was posted this week, this as Janet Yellen, Chairwoman with the Federal Reserve Bank, again voiced concerns that interest rates may be raised sooner than anticipated by investors by the central bank.

One day earlier, Treasury bonds rallied, sending the benchmark 10-year note yield to the lowest level in over 12 months. According to some traders, the comments made by Yellen, coupled with Russia’s currency stabilizing from turmoil recently experienced, pushed investors to cash in chips from the Treasury market.

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During afternoon trading, 10-year note yield climbed from the prior day of 2.07% to 2.146%. Since September, the 0.08% point increase was the most on a daily basis. Prices on bonds fall when yields increase.

On Wednesday afternoon, the Federal Reserve’s two-day monetary policy meeting ended. At this time, patience is still being shown by the central bank as far as raising interest rates. However, from a comment made by Yellen in a press conference call that followed the meeting, rates will not be increased for at least the next few meetings.

Within the bond market, Yellen’s comment increased anxiety that perhaps an increase could occur as early as the policy meeting scheduled for April 2015. If that happens than rates would go up prior to the second half of next year, which many investors expect. Yellen has been a longtime advocate for keeping rates close to zero in an effort to support the economy.

As stated by Adrian Miller, director of fixed-income strategies at New York-based GMP Securities LLC, Yellen’s comments were viewed by the bond market as being more hawkish. He added that for the timing of the interest rate policy, the Federal Reserve’s chair is never so specific.

If interest rates increase, newly issued bonds will become more appealing while reducing the value of bonds that investors currently hold.

This year, there was increased demand for the ultra-safe Treasury bonds as earlier this week they gained more momentum. Then on Tuesday, 10-year yield closed at the lowest level dating back to May 2013, a time when Russia’s currency reached a record low against the US dollar during turmoil within the market. Since the beginning of the year, yield has dropped from 3%.

As shown in global data, overseas economic growth is still faltering even though the economy in the United States has gained more traction.

In the meantime, financial markets are still being shaken out due to a ripple effect of long-term falling oil prices. These reduced prices have negatively impacted the outlook for growth in countries where economies depend heavily on the export of energy. Because of this, a number of investors have eliminated assets in emerging markets and moved cash into US government bonds deemed safer.

Regarding concerns over inflation, a huge threat to fixed income assets value, lower oil prices have calmed concerns. Over time, inflation begins to chip away at investors’ fixed returns while a slower pace of inflation helps save investors’ investments in fixed income assets.

In a report early Wednesday morning, last month’s US consumer prices dropped 0.3%, the sharpest decline since December 2009 on a month basis but also another sign of the impact that declining oil prices is having. Removing food and energy, inflation appears to be contained, matching forecasts by economists and climbing by 0.1%.

Overall, US Treasury debt reported a total return of 5.45% this year, which reflects appreciation in price in interest payments. For the same period, 8.85% was returned by the S&P 500 while corporate bonds with low rates, which are commonly referred to as “junk bonds”, has a loss of 0.31% that erased an earlier strong rally.

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Don Miller

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