Must-know: Macroeconomic factors influence US Treasuries

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Economic data in the week ending August 29

Economic data is one of the most important Treasury yield drivers. Disappointing data usually results in falling yields. During a downturn, investors prefer safer assets like U.S. Treasuries (TLT) (IEF) (UST) and investment-grade bonds. This usually increases their prices. It causes yields to fall. The base rate is also lowered by the central bank. This stimulates investment and economic recovery.

Part 2

Positive economic data is usually accompanied by rising yields. Markets factor in higher inflation expectations. The central bank raises rates. Last week, several major indicators were released. This pointed to economic momentum.

Gross domestic product

The Bureau of Economic Analysis (or BEA) revised its estimate for 2Q14 real gross domestic product (or GDP) growth. The BEA revised it upwards from 4% to 4.2%.

Consumption indicators

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Weekly retail sales indices, like ICSC-Goldman and Redbook, posted strong year-over-year (or YoY) growth in same store sales. This was driven by back-to-school shoppers. The Conference Board’s Consumer Confidence Index hit a post-recovery high of 92.4. Consumer confidence is a key consumption driver. It makes up over two-thirds of GDP. As a result, higher consumption means higher economic growth.

Manufacturing indicators

Durable goods orders increased by 22.6% in July. The increase spiked the S&P 500 Index (SPY) (IVV) to a new record. Regional manufacturing surveys conducted by the Federal Reserve Banks of Dallas, Richmond, and Kansas City all reported growth. However, according to the Dallas and Kansas City Fed reports, growth appeared to be slowing. Growth in the Midwest accelerated. The Chicago purchasing manager’s index (or PMI) increased to 64.3%.

Housing indicators

Housing market data was mixed. New home sales were disappointing. They came in at 412,000 versus expectations for 430,000. However, the Pending Home Sales Index posted an increase of 3.3%—compared to expectations for a 0.5% increase.

In the next part of the series, we’ll analyze other key drivers that affect Treasury yields and investment-grade bonds.

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