No inflation as yields jump belies point of no return view

Corporate Yields

Federated is buying investment grade and high-yield company debt as well as commercial mortgage-backed securities, he said. Company debt yields about 2.23 percentage points more than Treasuries, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.

Unemployment in the U.S. rose to 7.6% in May as the economy created 175,000 jobs, more than the forecast of 163,000 in a Bloomberg survey. While the jobless rate is down from 7.9% in October, it’s above the Fed’s goal of 6.5% before the central bank would consider raising the record-low benchmark interest rate of zero to 0.25% it has maintained since December 2008.

Average hourly earnings were flat in May, the Labor Department said. Total U.S. wages amount to 43.8% of U.S. economic output, the lowest since at least 1947, data from the Fed Bank of St. Louis show.

Stock Gains

The Standard & Poor’s 500 index rose 0.8% last week. The 16% gain for the year helped push household wealth up 4.5% in the first quarter, the central bank reported June 6. Consumer confidence increased to the highest since 2008.

“If the Fed pulls back from purchases too quickly the equity market is going to take a big hit and that is going to have a depressive effect on consumer confidence and could slow growth even further,” Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 21 primary dealers that trade with the central bank, said in a June 3 telephone interview.

Yields rose amid declining consumer prices from September 2005 through June 2007 as Fed interest-rate increases and surging leveraged buyouts and rising real estate activity pushed Treasury yields to a five-year high of 5.29% from 4.01% even as the PCE deflator dropped to 2.5% from 3.9%.

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