By Olivia Finan,
Money and Investing Writer
U.S. Treasury yields plummeted on Tuesday, with most maturities reaching a two-week low.
This came after the reading of US services index for August which reduced the expectation that the Federal Reserve would raise interest rates when it meets later next week.
The yield is usually expressed as a percentage rate based on investment cost, current market value, or face value.
The yield investment is directly linked to the risk associated with the investment. The higher the risk is, the higher the yield potential.
In an article written in Reuters, said Lindsey Piegza, chief economist at Stifel Fixed Income in Chicago states “one data point does not make a trend, thus, given industry growth remains in positive territory, albeit minimally above 50, policy officials are unlikely to sound the alarm bell but simply reiterate the need for further information to more clearly understand the … trajectory of the U.S. economy,”. “In other words, the recent weakness in the ISM Non-Manufacturing report will only exacerbate the uncertainty among Fed officials as to what the appropriate next move should be, as well as the timing of said adjustment to policy”.
By monitoring the ISM Non-Manufacturing Index, investors are able to better understand national economic conditions. When this index is increasing, investors can assume that the stock markets should increase because of higher corporate profits.
The opposite can be thought of the bond markets, which may decrease as the ISM Non-Manufacturing Index increases because of sensitivity to potential inflation.
As stated in an article on CNBC.com, “Tuesday’s Institute for Supply Management report on service-sector activity showed a drop in the index to 51.4, down from 55.5 in July and much lower than the consensus expectation for a reading of 55.7.
The drop in the ISM headline index was the steepest since November 2008. Fed funds futures prices indicated investors see just a 15 percent chance of a rate hike at September’s Fed meeting, down from 30 percent before the ISM data.
The perceived likelihood of a December rate increase, however, inched up to 50.8 percent in midday trading from about 47 percent immediately after the ISM data”.
At the same time, global equity markets are slightly higher as reported on Wednesday.
According to the Fed’s Beige Book report, the U.S. economy expanded moderately in July and August.
The Fed is looking to push inflation higher. The likelihood that the September rate hike moved up to 18 percent from 15 percent in the previous session and December rate hike expectation is close to 50 percent.
As stated earlier, the August employment rate reported weaker than expected, and combined with Tuesday’s soft data on the services sector have diminished expectations that the Fed will increase rates when it meets next week.
The report shows that U.S. employers added over 150,000 jobs in August, 30,000 jobs less than what economists expected.
According to Reuters, “We’ve had very quiet market activity for a couple of months … And a lot of uncertainty on policy,” said Tim Courtney, chief investment officer at Exencial Wealth Advisors.
The Dow Jones industrial average .DJI fell 24.24 points, or 0.13 percent, to 18,513.88, the S&P 500 .INX lost 2.15 points, or 0.1 percent, to 2,184.33 and the Nasdaq Composite .IXIC dropped 4.55 points, or 0.09 percent, to 5,271.35.
Economists believe that the U.S. economy will “bounce back” by the end of 2016 as long as job growth continues and the service sector rises.
A version of this article appeared in the Tuesday, September 13th print edition.
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