Long-Term Treasury ETFs In Play Post Fed Decision
Zacks Investment Research | Jun 14, 2017 10:01PM ET
As widely expected, the Fed raised interest rates for the third time in six months by a quarter percentage points and laid out plans for unwinding its $4.5 trillion balance sheet starting this year. It will likely reduce bond holdings by a maximum of $50 billion per month, or $600 billion per year. The action would lead to a rise in long-term yields, thereby dimming the appeal for long-term Treasury bonds.
However, the process will be gradual and take years to be accomplished. While the central bank stated its intention of hiking rates once more this year, lower-than-expected inflation is expected to be bullish for long-term bonds. The Fed expects inflation to stabilize but remain below its 2% target this year given rounds of weak inflation data. This move led to a decline in long-term Treasury yields to their lowest level since November.
In fact, yields on 10-Year Treasury note plummeted to 2.138%, the biggest one-day decline in about a month and 30-Year Treasury yields tumbled to 2.783%. As a result, yield curve flattened post Fed release with the spread between the yields of the 2-Year and 10-Year Treasury notes narrowed to below 80 bps, representing the tightest level since early September. It is close to a spread of 75 bps seen in July 2016 that marked the flattest level since 2007. The behavior of the yield curve justifies the bullish trend in long-term Treasuries (read: Zacks Investment Research
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