Now that the Greek crisis has taken a temporary reprieve and the euro continues to act as Greece’s only currency, the focus has moved across the Atlantic and has come back to the question of whether or not the Federal Reserve will increase interest rates and if so, if it will take place by the end of 2015.
The U.S. economy has improved considerably over the last few months and the dollar has strengthened accordingly. Fed Chairman Janet Yellen has been hinting at a rate increase for most of the last year and has postponed setting an exact date for the event during the period when the ECB were trying to work out a deal with the Greek government to keep the country from financial bankruptcy. But now that Athens has accepted the terms of the Eurozone proposal, investors are looking to the U.S. central bank as the next major event of the year.
Treasuries as a Safe Haven
For most of the 2015, investors have sought the safe haven of U.S. government debt. But with the removal of a Grexit threat and a recognizable spurt in the U.S. economy, these government instruments are deemed by many to be no longer necessary. 30-year treasury bonds have tumbled 12 percent since the end of March, down 1.8 percent in July, its fourth month in a row. And overall, the treasury market has fallen 2.2 percent during the same period.
Treasuries across the board fell again on Monday as Greek Prime Minister Alexis Tsipras and European creditors agreed to a rescue plan for the nation, eliminating a need for Americans to move to these safer securities. Needless to say, any wavering on the part of Tsipras and his government to abide by the plan could send investors scurrying back to these instruments.
The yield on the long bonds climbed to 3.25 percent Monday, within a basis point of the highest level since September. Benchmark 10-year yields dropped three basis points to 2.43 percent. The higher yield on 30-year bonds over two-year notes widened to 257 basis points on July 10, the biggest difference since November but now stands at 254 basis points.
Yellen will be addressing U.S. lawmakers on Wednesday and Thursday. With the growth in the American economy and unemployment down in June to a seven year low of 5.3 percent, the Fed may be ready to end the zero-interest rate policy it put into place during the financial crisis of 2008.
The timing for the rate increase is still up in the air, however. Although Yellen said last week that the increase would be “appropriate later this year,” it may not come until the beginning of 2016 and maybe even later than that.
Traders have been patient so far and haven’t expected the rate change until things settled down in Greece. They project at least another six months, maybe longer, before the central bank sees sufficient growth to warrant the move. It’s a wait and see game.