U.S. Treasury yields rose across the yield curve last week, except for one-month and three-month Treasury bills. A better-than-expected US jobs report raised speculation that the Federal Reserve may raise interest rates in 2016. The FOMC (Federal Open Market Committee) meeting will be held on March 16–17, 2016. Market participants are expecting some guidance from policymakers on interest rates.
Stocks rebounded with stability in oil prices last week, which led to a fall in the demand for safe-haven Treasuries. The yield on the benchmark ten-year Treasury note rose 12 basis points week-over-week, ending at 1.9% on March 4.
Ray Dalio sees more easing by the Fed
Ray Dalio, founder of Bridgewater Associates with more than $150 billion in assets under management, runs the largest hedge fund in the world. He believes the Federal Reserve will ease its monetary policy. Dalio said, “If you look around the world, our risk is not inflation, and it’s not overheating economies.”
The United States Department of Labor released its non-farm payroll and unemployment data on March 4. Treasury yields rose due to the upbeat jobs data. Non-farm payrolls rose by 242,000 in February, up from 172,000 in January. Thus, a strong jobs report along with rising inflation could drive the Federal Reserve to raise interest rates this year.
Meanwhile, the unemployment rate remained unchanged at 4.9%. Average hourly earnings fell 0.1% month-over-month and 2.2% year-over-year in February.
Treasury yields rose after the release of the ISM (Institute for Supply Management) Manufacturing Index. The index rose to 49.5 in February from 48.2 the month before. This indicated that the slowdown in the US manufacturing sector may not push the country into recession.
A strong dollar, weak global demand, a slowdown in China, and a decline in commodity prices will impact revenues and margins of industrial companies such as General Electric (GE), Caterpillar (CAT), Lockheed Martin (LMT), and United Technologies (UTX).
Mutual funds such as the Vanguard Long-Term Treasury Fund Investor Shares (VUSTX) and the T. Rowe Price U.S. Treasury Long-Term Fund (PRULX) provide exposure to Treasury securities. VUSTX and PRULX fell by 1.2% and 1.1% respectively, last week.
In the rest of this series, we’ll take a close look at Treasury bill auctions last week.