We have one month left of 2014.
When we started 2014, the US Federal Reserve Board’s FOMC was reducing purchases of Treasury and agency mortgage-backed securities every month. The Board had since stopped the asset purchase program by the end of October 2014. This was on account of improving US economy and such monetary stimulus program was deemed not necessary.
FOMC still wanted to maintain the target range for the federal funds rate at 0% to 0.25% for a considerable time. When will interest rate for US start to rise is still a subject of market speculation. Some suggested that by mid 2015, FOMC would raise federal funds rate.
What do all these mean to yields of fixed income instruments?
I expected, like most economists and analysts, that yields of government bonds (treasury notes) to rise since Federal Reserve Board is turning less accommodative in its monetary policies. But when I checked the 10-year Treasury Notes, the yield was 2.98% at start of 2014 and it was now 2.19% as at 28 November. This is a drop of 0.79 percentage point and not an increase as anticipated. Prices of Treasury Notes move in opposite direction as their yields. Therefore prices of Treasury Notes rose during this period. There was demand for these Treasury Notes in the market thus pushing up prices for them.
Fixed income instruments take cues from government bonds. Quality fixed income investments did not collapse this year as feared by some market commentators. This is good news for fixed income investors, at least for this year. Would 2015 be different? Watch this space.
Copyright © 2014, limkimtong for Living Investment
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