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May 03, 2014 at 11:01 AM
Late last year, just before the Federal Reserve began its scaling back on monthly Treasury bond purchases, the conventional wisdom was that interest rates would rise and bond prices would fall. Invariably, the consensus opinion was — at it has been since quantitative easing began in 2008 — “interest rates have nowhere to go but up.”
In this case, the widespread belief was a simple measure of supply and demand. Logically, if the Fed is buying fewer Treasuries, it would create less demand for U.S. debt and cause bond prices to trade at lower prices.
Yet, like so many times before, the logic of conventional wisdom was dead wrong. And this time is no different.
In January, the Fed reduced its monthly QE-bond purchases to $65 billion per month. Instead of crashing like many people expected, ETFs tied to the performance of long-term Treasury bonds like the iShares 20+ Year Treasury Bond ETF (TLT) suddenly jumped almost 6% in January. The SDPR S&P 500 ETF (SPY), by comparison, fell 2.59%. Who could’ve foreseen such a berserk outcome?
During its just completed FOMC meeting, U.S. policy makers agreed to cut QE even further – to $45 billion. How did the bond market react? Prices moved higher while yields marched lower. The sheer madness of what shouldn’t be happening keeps happening!
Now with 2014 almost half way over, the yield on 10-year and 30-year U.S. Treasuries has done the exact opposite of what most analysts predicted; by sliding in the vicinity of 12-13%.
