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Treasury Yields Rise on Upbeat Consumer Inflation Data

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Secondary market

US Treasury yields rose across the yield curve for the week ended February 19, 2016, after upbeat consumer inflation data suggested that the Federal Reserve may hike interest rates earlier than market expectations.

However, the rise in the yields was restricted to the single-digits. The yield on the benchmark 10-Year Treasury Note rose by 2 basis points week-over-week, ending at 1.8% on February 19.

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Minutes of FOMC January 26–27 meeting

On February 17, minutes from the Federal Open Market Committee (or FOMC) January 26–27 meeting were released. The minutes signaled the Federal Reserve’s dovish outlook on raising interest rates given global financial uncertainty, a slowdown in the Chinese markets, and the constant fall in crude oil prices.

James Bullard, president and CEO of the St. Louis Federal Bank, was of the opinion that it would be “unwise” to hike interest rates in the current economic situation of subdued inflation and global volatility.

Economic indicators

Consumer price index (or CPI) data were released on February 19. Treasury yields rose post-release of the better-than-expected data. Core consumer prices excluding food and energy prices rose 0.3% month-over-month in January, the highest since August 2011. They rose 2.2% year-over-year in January 2016, the highest since June 2012.

Housing starts, building permits, and industrial production data were released on February 17. Treasury yields nudged up after the release of the data. Housing starts fell 3.8% month-over-month to 1.10 million units last month from December’s total of 1.14 million units. The unexpected fall in housing data was mainly attributed to bad weather, especially in the Northeast and Midwest regions of the country, which disrupted construction activity.

New building permits also fell marginally by 0.2% month-over-month to 1.2 million units in January. A fall in building permits impacts the revenues of homebuilders and home improvement companies such as PulteGroup (PHM), Lennar (LEN), D.R. Horton (DHI), and Home Depot (HD).

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Industrial production jumped 0.9% in January 2016, the largest gain since November 2014, which was followed by a 0.7% drop in December. Industrial production was boosted by a 0.55 rise in manufacturing output of durable goods such as machinery, furniture, and primary metals. However, industrial output was negatively impacted by lower oil prices, sluggish global demand, and a strong dollar.

Investment impact

The rise in the Treasury yields has a negative impact on mutual fund returns. The Dreyfus U.S. Treasury Long-Term Fund (DRGBX) was flat, while the T. Rowe Price U.S. Treasury Long-Term Fund (PRULX) fell by 0.33% week-over-week.

In the next article, we’ll see how demand for 30-Year Inflation-Protected Securities has fared in February.

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