Weekly review: How the US Treasuries and corporate bonds performed (Part 1 of 10)
Monetary policy unchanged, revised GDP and employment figures
The FOMC (Federal Open Market Committee) announced the unchanged Fed funds rate in its meeting held on March 18-19, 2014. The committee indicated harsh weather as a major factor for the slowdown in the economic activity. The long-remained threshold of 6.5% unemployment rate to trigger the increase in the Fed funds rate has been replaced with a more generic approach using a range of economic data with no specific target. The early outlook for the March employment report was positive; however, the month’s data suggested mixed reviews. The week-to-week comparison of initial jobless claims came in lower at 320,000 versus analysts’ expectation of 325,000.
Based on the current and future U.S. economic outlook, the committee forecast on gross domestic product growth (Or GDP) and civilian unemployment rate have been revised downward. Price consumption expenditure inflation (Or PCE) numbers are essentially unchanged from December at 1.6% for 2014.
There are different factors that affect the GDP growth and unemployment rate. However, other things being constant, it has been observed that with an increase in the GDP growth rate, the unemployment level declines and vice-versa. Plus, higher GDP growth also implies economic expansion which is usually accompanied by an increase in the number of jobs and consumption expenditure.
Higher GDP also translates into healthier corporate profits, as the demand for product and services spurs. This may lead to a rise in inflation, which directly impacts the market interest rates. Higher interest leads to a decline in the bond prices (BND).
The stock market (SPY) tends to grow with the growth in GDP; however, if inflation goes overboard, it may impact the profitability of the major mortgage lender and consumer companies such as AG Mortgage Investment Trust Inc (MITT) and Annaly Capital Management (NLY).
Among the other major releases last week, the housing market and the retail sales (XRT) continued to decline. The average 30-year fixed mortgage rate—an important driver for the mortgage lending firms was down by 2 basis points to 4.50%. Other indicators including manufacturing gained some traction after being severely dampened by the harsh weather conditions.
The next part of the series explains how last week’s economic events have impacted the Treasury yields.
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