Long-Awaited Week: The FOMC Meeting and a Lot of Data
The basis for numerous long-term interest rates
Ten-year bond yields influence everything from mortgage rates to corporate debt. They’re now the benchmark for long-term US interest rates. Some of you might remember when the 30-year bond was the benchmark, but that changed in the 1990s. When investors want to know what’s going on in the bond market, in essence, they want to know where the 10-year bond is trading.
Note that short-term rates are still important, particularly LIBOR ( IntercontinentalExchange London Interbank Offered Rate ), which is the base rate for almost all short-term rates.
Rate information is relevant to REITs such as American Capital Agency (AGNC), Annaly Capital Management (NLY), Redwood Trust (RWT), and MFA Financial (MFA). Investors can trade the in REIT sector via the iShares Mortgage Real Estate Capped ETF (REM).
Bond yields rise on the risk-on trade
After closing out the prior week at 2.12%, bond yields, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), rose by 6 basis points to go out at 2.18%. Bonds have been heavy, as Chinese selling of Treasuries prevented yields from falling all that dramatically during the market sell-off and then pushed yields markedly higher as people swapped out of Treasuries and moved into stocks.
The consensus is growing that the Fed will stand pat in September
Federal funds futures contracts can be used to estimate the market’s probability of a rate hike in September. After staying close to 50% during the summer, the sell-off in worldwide markets has pushed that assessment closer to 30%. That being said, the Fed has been making hawkish comments about the economy, and the jobs report was probably good enough to give the FOMC the comfort level it needs to raise rates in September. The only reason not to raise rates is that inflation remains well below the target level. As many market observers have noted, the sell-off has caused credit spreads to widen, which acts as tightening even if short-term rates don’t move.
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