Fed minutes moved yields
U.S. Treasury yields rose across the yield curve for the week ended May 20, 2016. This came as minutes of the FOMC’s (Federal Open Market Committee) April meeting raised the probability of a rate hike in June. According to CME Group’s FedWatch, “The probability of a June rate increase by the Fed rose to 34 percent after the release of the FOMC minutes on Wednesday from 19 percent earlier in the day, 15 percent on Tuesday, and less than 1.0 percent a month ago.”
Most policymakers said a rise in the interest rate may be appropriate at the June meeting if economic data improve. Dennis Lockhart, president and CEO (chief executive officer) of the Federal Reserve Bank of Atlanta, said, “June certainly could be a meeting at which action could be taken.”
For the week ended May 20, the two-year Treasury yield rose 13 basis points to end at 0.89%. The ten-year Treasury yield rose 14 basis points and ended at 2.1%.
Upbeat economic data in April painted a positive picture of the US economy, which supports an interest rate hike in the coming months.
The Consumer Price Index (or CPI) increased 0.4% month-over-month (or MoM) in April. It was the largest gain since February 2013 after rising 0.1% in March. CPI rose 1.1% year-over-year (or YoY) in April from 0.9% in March. Core CPI, which excludes volatile food and energy costs, rose 2.1% YoY in April after increasing 2.2% in March.
Existing home sales (PHM) (LEN) increased 1.7% to an annual rate of 5.5 million units in April. The rise in home sales was mainly due to increased sales in the Midwest region. US industrial production (CAT) in April increased 0.7% MoM in April, the biggest monthly gain since November 2014. That shows signs of the manufacturing sector bouncing back.
As yields on most Treasury securities rose, associated ETFs and mutual funds fell due to the inverse relationship between yields and prices. For the week ended May 20, 2016, the iShares 20+ Year Treasury Bond (TLT) and the iShares Core US Aggregate Bond (AGG) fell 1.6% and 0.6%, respectively. The Dreyfus U.S. Treasury Long Term Fund (DRGBX) fell 1.5%, and the Wasatch-Hoisington U.S. Treasury Fund – Class A (WHOSX) fell 1.6% week-over-week.
In the next part of this series, we’ll look at the FOMC’s minutes for April.