Last week was an important week for the markets: On Wednesday afternoon, the Federal Open Market Committee and Federal Reserve Chairman Ben Bernanke clarified the central bank’s stance with regard to its $85 billion-per-month quantitative easing (bond-buying) program.
In the wake of that event, both of the following stocks generated enormous interest — and experienced surging volumes. They share at least two characteristics, the first of which is that, strictly speaking, neither of them is a stock.
iShares 20+ Year Treasury Bond Fund
From Wednesday through the end of the week, the average daily volume of the iShares 20+ Year Treasury Bond Fund was 21.6 million shares — almost two and a half times the daily volume over the past three months. The ETF, which holds long-dated U.S. Treasury bonds, lost 4.8% on the week (price return), virtually all of which occurred during the last three days of the week. To put that figure in context, it is the fund’s third worst week in its nearly 11-year history, and the worst since July 2009. What was the reason behind this drop?
A reminder: The Fed’s objective in implementing massive monthly bond purchases was to lower long-term interest rates — increased demand for bonds push their prices up (bond prices and bond yields are inversely related).
As such, when Bernanke confirmed on Wednesday that the Fed expects to slow its bond purchases this year, before halting them altogether sometime next year (assuming the Fed’s economic outlook bears out), investors sold bonds in anticipation of the Fed’s retreat — which will remove an important source of demand from the market. On Friday, the yield on the 30-year Treasury bond rose to 3.58%, its highest level since August 2011 (it started this year below 3%).
SPDR Gold Shares
During a week that wasn’t kind to risk assets — the SP 500 lost 2.1% — Treasury bonds weren’t the only “safe haven” asset that could provide no shelter for investors, as gold fell 6.9%.
The most popular vehicle for owning (or shorting) gold, the SPDR Gold Shares was down 7% on the week, its seventh largest weekly loss since the fund’s inception in November 2004, and the worst since the week of Sept. 19, 2011, when it dropped 9.2%. Why did the yellow metal fall?
There are at least two reasons. First, as interest rates rise (see above), the opportunity cost of having one’s wealth parked in an asset that offers no yield rises. Second, the Fed’s indicated that its outlook for the economy had improved; if it is correct, this diminishes gold’s value as a form of insurance (or its appeal as a “catastrophe trade,” if you will.)
At the time they occur, it’s difficult to get perspective on events in the financial markets, but my guess is that last week was a watershed moment. In a few years, we may look back and realize that the Fed just rang the bell on the bull market in bonds. As for the bull market in gold, it almost certainly ended when the yellow metal ran up past $1,900 per ounce in August 2011; nevertheless, the Fed’s announcement only adds to the downward pressure on goldl’s price.