Following the flood of better-than-expected economic data out of the U.S. this week, yields on both short-term and the longer tenor benchmark Treasury notes have risen to new multiyear highs. 2-year yields reached 2.598%, its highest since August 2008, and 5-years hit 2.957%, its highest since June 2009. The yield on the benchmark 10-year Treasury note, especially important given its benchmarking role in helping to set rates for a whole range of business and consumer loans, including home mortgages, climbed to 3.122%, its highest since July 2011 and the 30-years rose to 3.248%, its highest since July 13, 2015.
The streak of solid economic data included the Labour Department announcing that though new applications for U.S. jobless benefits increased slightly more than anticipated, the number of Americans on unemployment fell to its lowest level since 1973. Initial claims for state unemployment benefits had risen by 11,000 to a seasonally adjusted 222,000 for the week ended May 12, as compared to results of a poll of economists by Reuters forecasting claims to rise to 215,000. These latest figures reinforce that the labor market is approaching full employment with a jobless rate near a 17-year low of 3.9%.
The Federal Reserve, which seeks to balance goals of maximum employment and stable prices, will be more amenable to rising rates in a environment of low unemployment and rising inflation. The central bank had said on May 2nd that inflation was moving closer to its 2% target as input prices creep up across the economy. Rising inflation, which threatens Treasury prices because it erodes the purchasing power of their fixed payments, puts upward pressure on rates. The Fed next meets on June 12, when it is expected to hike the federal funds rate for the second time this year.
The Commerce Department also reported that retail sales increased at a decent pace in April, while March’s figure was revised upward. Retail sales data can be important over time given that they correspond closely with the consumer spending component of gross domestic product.