Treasury Yields Rose, Hopes of a Rate Hike Remain in 2016

Treasury yields rose

Treasury yields rose across the yield curve for the week ending August 19. The minutes from the July 26–27 FOMC (Federal Open Market Committee) meeting indicated that the next rate hike might come as soon as September, if economic data support it. Yields got support from hawkish comments on the rate hike from New York Fed President William Dudley. On August 18, he said that a rate hike is “in play” in September’s policy meeting.

Meanwhile, market participants are looking forward to more guidance from Fed Chair Janet Yellen. She will speak August 26 at the global policymakers meeting in Jackson Hole, Wyoming.

Treasury Yields Rose, Hopes of a Rate Hike Remain in 2016

For the week ending August 19, the two-year Treasury yield—the most sensitive to the federal funds rate—rose by 5 basis points and ended at 0.76%. The benchmark ten-year Treasury yield rose by 7 basis points and ended at 1.6%.

CPI remained unchanged in July

The CPI (consumer price index) remained unchanged in July after recording a 0.2% gain in June. The core CPI, or CPI Ex Food & Energy, rose 0.1% month-over-month in July. The CPI didn’t grow due to lower gasoline (CVX) (WMB) (DUK) and food prices. Meanwhile, the core CPI rose 2.2% year-over-year in July—compared to a 2.3% gain in June. Subdued domestic inflation is one of the primary reasons why the Fed hasn’t raised the interest rate since December 2015.

However, Federal Reserve Bank of Atlanta President Dennis Lockhart said on August 18 that “I think it’s still conceivable we could have two rate increases this year.” He thinks that the US economy is moving forward, while consumer spending and wage growth are pointing towards stronger growth.

Investment impact

As long-term Treasury yields rose, associated ETFs and mutual funds fell due to the inverse relationship between yields and prices. For the week ending August 12, the iShares 20+ Year Treasury Bond Fund (TLT) and the iShares 7-10 Year Treasury Bond ETF (IEF) fell 1.0% and 0.5%, respectively. Meanwhile, the Dreyfus US Treasury Long Term Fund (DRGBX) and the T. Rowe Price US Treasury Long-Term Fund (PRULX) were down by 1.0% each week-over-week.

In the next part, we’ll look at the highlights of the FOMC minutes.