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Fed Minutes Surprise Market

As some of you are aware, Mark is out of the country for the week. In his absence, I wanted to post a short update on what will likely be a fairly significant event over the coming year. Earlier today, the Fed released the minutes from their December 11-12 meeting. The minutes showed that several members of the FOMC wanted to consider ending the bond buying program before the end of 2013. This seems to be a significant change from what the market was expecting. One of the key market reactions, at least initially, has been a fairly sharp rise in interest rates.

The shorter end of the bond market has seen relatively little impact, but the longer end has seen quite a move today, which has the effect of steepening the yield curve. The ten year treasury rate has risen from 1.837% this morning, to 1.902% as I write this. That may not sound significant, but it is quite a move in one day. Also, remember that as interest rates rise, prices of existing bonds fall. The price of a ten year treasury bond (this is a good proxy for high grade bond funds with longer durations too) is down about 0.60% on the day. The chart below shows the moves over the past two days in TLT (a good proxy for 20yr duration bonds) and SHY (a good proxy for 2yr duration bonds).


As you can see, the price of longer-term bonds was down quite a bit today. Of course, that also means the yield went up, so investors buying today are able to lock in higher rates of return. This will be a pretty important market to watch over the coming months, as it will have an influence on most of investment markets, from precious metals to stocks, commodities, and real estate.

I wish you all a happy and prosperous new year.