Last week’s bond selloff provided a foreshadowing of the U.S. stock segments likely to suffer as the eventual Federal Reserve (or Fed) rate liftoff nears.
Last week, U.S. economic data came in mixed. While U.S. wages appeared to strengthen, most measures of U.S. economic growth continued to disappoint.
Typically, mixed economic data would trigger a bond rally as investors engage in a “flight to quality.” So it was somewhat surprising that investors sold U.S. bonds last week, driving yields higher and prices lower. The yield on the 10-year Treasury, for instance, rose from 1.91% to 2.11%.
Market Realist – It was indeed a case of market paradox as bond yields (IEF) rose last week—even as weak economic data flooded in. Data weakness usually prompts investors to invest in safe-haven assets like gold (GLD), silver (SLV), and US Treasuries (TLT). Although gold (IAU) rallied over the past two days and even flirted with the $1,200 per troy ounce mark, Treasuries continue to see outflows.
Economic data from the US is still mixed. The US GDP (gross domestic product) growth rate stalled to a meager 0.2% in 1Q15, largely below analysts’ expectations. This can be seen in the previous graph.
In contrast, wage growth seems to show some signs of a rebound. According to BLS estimates, the employment cost index surged 2.6% over the year—the highest it has been since 4Q08. Private industry workers’ wages and salaries rose by 2.7% on an yearly basis. The employment cost index is an important indicator for inflation.
The US manufacturing PMI (purchasing managers’ index) remained unchanged at 51.5 in April—it was below analysts’ expectations. A rebound in manufacturing was expected. The effects of seasonal headwinds’ impeding growth—like the weather and the West Coast port strike—should have receded by now. A lack of expansion in manufacturing has analysts worried about the ability of the US economy to stage a rebound in the second quarter.
Despite mixed economic data, US Treasuries experienced a sharp sell-off last week. Yields have been increasing over the past two weeks. Treasury yields rise as prices fall. The ten-year Treasury yields increased from 1.87% as of April 17 to 2.12% on May 1. Yields continued to climb over the past two days, reaching a two-month high of 2.19% on May 5, 2015. The previous graph shows the sharp upward movement of the yield curve over the course of the past two weeks.
What’s the reason behind the market paradox of higher yields despite weak economic data? We’ll discuss this in the next part of this series.