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Treasury Yield Curve Flattens: Strong Inflation and Housing Data

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Strong inflation and housing data resulted in a rally in long-term bond yields. US Treasury yields rose marginally at the short end of the yield curve. However, they fell at the long end of the curve for the week ending July 17, 2015.

The yield on the benchmark ten-year Treasury note fell by 8 bps (basis points) week-over-week. It ended at 2.34%. Meanwhile, yields on 20-year and 30-year Treasury bonds fell sharply by 14 bps and 12 bps, respectively, week-over-week.

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Impact of Janet Yellen’s speech

Treasury yields rose after Fed Chair Janet Yellen’s comment.

In a testimony prepared for the U.S. House of Representatives FSC (Financial Services Committee), Yellen said, “If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate.”

Usually, banking stocks like Bank of America (BAC) and Citigroup (C) are impacted positively by a rate hike.

Economic indicators

A series of economic indicators were released last week. This directed the movement in yields. The healthy housing and inflation report put the biggest upward pressure on yields.

Housing starts figures beat expectations. It’s important to note that 1.174 million new houses were built in June. This was revised upwards from 1.069 million in May. A rise in home construction is good news for homebuilders like D.R. Horton (DHI) and PulteGroup (PHM).

Inflation rose for the fifth straight month due to a rise in the price of gasoline and other food products. The CPI (consumer price index) rose by 0.30% in June compared to 0.40% in May. The core CPI excludes food and energy. It rose by 0.10% to 1.80%—compared to last year.

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Greece has been rescued for now

Greece will receive a bridge loan of 7 billion euros from the European Financial Stability Mechanism to make a bond payment to the ECB (European Central Bank) on July 20 and clear its debt with the IMF (International Monetary Fund).

Investment impact

The following mutual funds provide exposure to US Treasuries. Investors should note that Treasury yields and prices are inversely related.

  • The American Century Ginnie Mae A (BGNAX) fund provided weekly returns of 0.32% and a YTD (year-to-date) return of 0.09%.
  • The Prudential Government Income A (PGVAX) fund provided a week-over-week return of 0.44% and a negative YTD return of 1.26%.

In the rest of this series, we’ll look at the Treasury bills auction that took place last week.

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