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Why Treasury Yields Fell Last Week: The Labor Factor

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May. 9 2016, Published 4:19 p.m. ET

Labor data moves yields

US Treasury yields mostly fell across the yield curve last week after the US Department of Labor reported that the economy added fewer jobs in April. New jobs were under expectations, raising concerns about economic growth. The possibility of a rate hike in June’s meeting is getting vaguer after the weak jobs report data.

However, New York Federal Reserve President William Dudley said in an interview with the New York Times, “two rate hikes from the Fed were still a ‘reasonable expectation’ this year.”

Last week, the two-year Treasury yield fell three basis points to end at 0.74% while the ten-year Treasury yield was down four basis points and ended at 1.79%.

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Jobs data

Nonfarm payrolls increased by 160,000 jobs in April, far below the expectation for 202,000 jobs. This was the smallest job gain in the last seven months. The March figure also faced a downward revision to 208,000. Hiring was slow due to weaker economic growth, lower productivity, and soft corporate earnings. The private services sector—including leisure, travel, et cetera—dominated employment gains in April. We saw job losses in the mining and energy sector due to weak profits from a prolonged drop in oil prices (XOM)(CHK)(CVX). The manufacturing sector added 4,000 jobs in April after shedding 29,000 in March.

Meanwhile, average hourly earnings increased 0.3% month-over-month in April. The year-over-year increase was 2.5%, up from 2.3% in March. The rise in average hourly earnings may help boost inflation, which has been below the Fed’s 2% target. The unemployment rate remained steady at 5%.

Investment impact

As yields on most Treasury securities fell, associated exchange-traded funds (or ETFs) and mutual funds (or MFs) rose due to the inverse relationship between yields and prices. For the week ended April 1, the iShares 20+ Year Treasury Bond Fund (TLT) and the iShares Core US Aggregate Bond Fund (AGG) rose 1.0% and 0.3%, respectively. Meanwhile, the Dreyfus US Treasury Long Term Fund (DRGBX) was up by 0.7% and the Wasatch-Hoisington U.S. Treasury Fund – Class A (WHOSX) rose 0.9% week-over-week.

In the next part of this series, we’ll look at the Treasury bill auctions last week.

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