ETFs Trade Higher After Fed Statement and Remarks by Powell

Large exchange-traded funds (ETFs) investing in bonds received a boost following the Federal Reserve's announcement on Wednesday that it would maintain its benchmark interest rate at its current level as part of its ongoing effort to combat elevated inflation.

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In its policy statement released at 2 p.m. Eastern Time on Wednesday, the Fed stated that "tighter financial and credit conditions for households and businesses are expected to exert downward pressure on economic activity, hiring, and inflation." The tightening of financial conditions is a significant aspect that BlackRock's Chief Investment Officer of Global Fixed Income, Rick Rieder, highlighted as an area of focus in the Fed's communication after the conclusion of its policy meeting.

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Fed Chair Powell, in his press conference on Wednesday, indicated that the central bank is closely monitoring the rise in longer-term bond yields, which has contributed to a tightening of broader financial conditions since the summer. He emphasized that persistent changes in broader financial conditions could impact the trajectory of monetary policy.

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As of the last update, shares of the iShares Core U.S. Aggregate Bond ETF (AGG) were up 0.9% on Wednesday afternoon, concurrent with falling Treasury yields, based on FactSet data. The yield on the 10-year Treasury note (BX:TMUBMUSD10Y) had dropped by approximately 14 basis points to around 4.76%, while the two-year Treasury yield (BX:TMUBMUSD02Y) was trading 12 basis points lower at 4.94%.

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Bond ETFs with longer-term maturities experienced substantial gains in Wednesday afternoon trading. The iShares 20+ Treasury Bond ETF (TLT) increased by 1.8%, while the iShares 10-20 Year Treasury Bond ETF (TLH) gained 1.6%. Both funds have seen double-digit losses through October on a total return basis in the current year, primarily due to rising yields adversely affecting bond valuations.

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Conversely, investments in the short end of the yield curve performed better in 2023. The iShares 1-3 Year Treasury Bond ETF (SHY) yielded a total return of 2% through the previous month, according to FactSet data.

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Powell noted during the press conference that monetary policy is currently restrictive. The Fed decided to maintain its benchmark rate within a target range of 5.25% to 5.5% on Wednesday.

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The Fed's statement emphasized that the Committee would continue to assess incoming data and its implications for the economic outlook when determining the appropriate stance of monetary policy. These assessments will consider a wide range of information, including labor market conditions, inflation pressures and expectations, and developments in the financial and international arenas.

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