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Treasury Yields Rise on the Possibility of Rate Hike by Year End

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Secondary market

Treasury yields rose across the yield curve, except for six-month Treasury bills, in the week ending September 25, 2015. This came after Janet Yellen, chair of the Federal Reserve, commented on the possibility of a rate hike later this year.

The rise in yields of two-year to 30-year maturity securities was in the range of 1–4 basis points. The yield on the benchmark ten-year note ended at 2.17%, up by 4 basis points from the previous week.

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Comments by Federal Reserve officials

Treasury yields rose after the comments made by Fed officials. On September 24, Janet Yellen stated that “it will likely be appropriate to raise the target range of the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective.”

On September 21, Federal Reserve Bank of Atlanta President Dennis Lockhart, said “As things settle down, I will be ready for the first policy move on the path to a more normal interest-rate environment. I am confident the much-used phrase ‘later this year’ is still operative when it comes to raising borrowing costs in the U.S. economy to more historically normal levels.”

St. Louis Fed Chief James Bullard and San Francisco Fed Chief John Williams also said that the possibility of a rate hike remains likely this year, depending on how global and local economic developments pan out.

Caixin/Markit China Manufacturing PMI and Treasury yields

The flash reading of Caixin/Markit China Manufacturing Purchasing Managers’ Index, or PMI, fell to 47.0 in September, down from August’s final reading of 47.3. The reading pointed to a sharp contraction in Chinese manufacturing activity, which led to a fall in Treasury yields.

Multinational companies such as Apple (AAPL), Ford Motor Company (F), and Nike (NKE), which have large exposure to the Chinese market, are adversely impacted by this manufacturing slump.

Investment impact

A rise in Treasury yields across the yield curve led to a fall in mutual fund returns, as prices and yields are inversely related. Week-over-week returns of the T. Rowe Price GNMA (PRGMX) and the American Century Ginnie Mae A (BGNAX) fell by 0.36% and 0.35%, respectively.

Several Treasury note auctions took place last week. We’ll look at them in detail beginning with the auction of seven-year Treasury notes.

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