Posted on March 9, 2015 by the XM Investment Research Desk at 12:50 pm GMT
US treasury yields and the dollar surged on Friday after the release of the nonfarm payrolls report. The strong jobs numbers increased bets among investors that the Federal Reserve would raise interest rates by the middle of this year.
Increased optimism for the US economy results in a reduced demand for treasuries (which are seen as safer assets). This consequently leads to a rise in yields as bond prices fall (the two have an inverse relationship). Current holdings of bonds are being sold off as investors are worried that higher official interest rates from the Fed would undermine the value of outstanding bonds.
The 10-year treasury yields rose to 2.22%, the highest closing level since December 26, compared with 2.11% on Thursday.On the 2-year, the yield rose to 0.72% on Friday from 0.64 on Thursday.
The strengthening US economy is highlighted by recent US economic data that are pointing to a pretty healthy recovery. Friday’s nonfarm payrolls showed 295,000 jobs were added to the economy in February, beating forecast for an increase of just 235,000 jobs. The stronger number led to a reduction in the unemployment rate from 5.7% to a 6 ½ year low of 5.5% and compared to the 5.6% expected. An improving job market and generally cheaper fuel probably will help sustain consumer spending, which accounts for almost 70% of the US economy.
The dollar rallied after the jobs report, strengthening against most major counterparts. Against the yen, it rose to a high of 121.27 on Friday and held onto most of these gains on Monday. The euro fell to a new 11-year low versus the greenback to touch a low of 1.0821 early on Monday.
The US stock markets did not perform that well though and reacted negatively to the news. The prospects of higher rates was seen as bad news among some investors. The reason is because as treasury yields increase, so do the interest rates on consumer and business loans with similar lengths.
The Fed’s next policy meeting is scheduled on March 17-18. Investors will be looking for clues in the FOMC statement for the timing of the first rate hike. Also, should the word “patient” be dropped from the statement then the chances of a June hike will increase. The Fed funds rate is currently at a record low of 0.25%.