Shares of large exchange-traded funds that buy bonds were getting a lift after the Federal Reserve announced on Wednesday that it’s holding its benchmark interest rate steady as it keeps up its battle to bring down elevated inflation.
In its policy statement released at 2 p.m. Eastern Time on Wednesday, the Fed said that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” The tightening of financial conditions is one of the “critical concepts” that BlackRock’s chief investment officer of global fixed income, Rick Rieder, told MarketWatch that he would be focusing on Wednesday in the Fed’s communication after its policy meeting wrapped up.
See: Fed keeps freeze on interest rates in place as it fine-tunes fight vs. inflation
Fed Chair Powell indicated Wednesday during his press conference that the central bank is monitoring the increase in longer-term bond yields, “which have contributed to a tightening of broader financial conditions since the summer.” He said that “persistent changes in broader financial conditions can have implications for the path of monetary policy.”
Shares of the iShares Core U.S. Aggregate Bond ETF AGG were up 0.9% on Wednesday afternoon as Treasury yields were falling, according to FactSet data, at last check. The yield on the 10-year Treasury note BX:TMUBMUSD10Y was down about 14 basis points at around 4.76%, while the two-year Treasury yield BX:TMUBMUSD02Y was trading 12 basis points lower at 4.94%.
Bond ETFs with longer-term maturities were seeing sharp increases in Wednesday afternoon trading, with the iShares 20+ Treasury Bond ETF TLT up 1.8% while the iShares 10-20 Year Treasury Bond ETF TLH gained 1.6%. So far this year, both funds have seen double-digit losses through October on a total return basis as bond valuations were hurt by surging yields.
But bets on the front end of the yield curve have fared better in 2023, with the iShares 1-3 Year Treasury Bond ETF SHY returning a total 2% through last month, FactSet data show.
Read: UBS sees ‘greatest near-term upside’ in fixed income after market sentiment soured
“Monetary policy is restrictive,” said Powell, during the press conference. The Fed decided Wednesday to hold its benchmark rate at a target range of 5.25% to 5.5%.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the Fed said in its statement Wednesday. “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.