BOND REPORT: Treasury Yields Dip After Second-quarter GDP Data
July 28 2017 - 10:42AM
Dow Jones News
By Sunny Oh
Second-quarter GDP jumped 2.6% from 1.2% in the previous
quarter.
Treasury prices recovered from earlier weakness on Friday,
pulling down yields after a rebound in second-quarter economic
growth, but a lack of accompanying inflation and wage growth cast
doubt on the likelihood of another rate increase this year.
The yield on the benchmark 10-year Treasury note fell less than
a basis point to 2.304% from 2.312% in the previous session, while
the yield on the 30-year Treasury bond, lost 1.4 basis point to
2.912%, compared with 2.928% on Thursday.
The yield on the 2-year note was flat at 1.355%. Yields rise as
debt prices decline.
Treasury yields fell slightly after data showed second-quarter
gross domestic product grew at a 2.6% annual pace, below the
consensus forecast of 2.8% by economists polled by MarketWatch.
While the number is more than double the revised 1.2% pace seen in
the first quarter, it leaves the U.S. economy on a tepid expansion
path.
See: U.S. GDP speeds up to 2.6% in 2nd quarter
(http://www.marketwatch.com/story/us-gdp-accelerates-to-26-in-second-quarter-2017-07-28)
Though the overall economic report offered notes of optimism,
the personal-consumption expenditures index, the Fed's preferred
measure of inflation, only notched a gain of 0.3%, a sharp slowdown
from the 2.2% in the first quarter. While, the latest U.S.
employment cost index, a measure of wage pressures, rose 0.5%
(http://www.marketwatch.com/story/us-employment-costs-rise-05-in-2nd-quarter-eci-shows-2017-07-28),
slightly below forecasts. A trend of easing price pressures but
strengthening growth could prove worrisome to economists adhering
to the Phillips curve, a theory that ties slack capacity in the
labor market to wage growth, and thus, inflation.
The lack of inflation gave succor to the bond bulls as they
engaged in modest buying after the data's release. Higher consumer
prices can have a corrosive effect on the fixed-payments of
government paper.
"While growth was reasonable, the absence of inflation pressures
is more concerning and certainly doesn't point to any urgency for
the Fed to hike again later this year. Perhaps we're in for a
taper-and-pause dynamic," wrote Ian Lyngen, head of U.S. rates
strategy for BMO Capital Markets in a note to clients.
The Federal Reserve has spent the past few months signaling that
balance sheet reduction is likely to begin in September, but
analysts say the prospect for another rate increase this year
remains uncertain.
Market participants argue the U.S. central bank's actions hinge
on inflation and growth developments, after previous statements in
which members of the Federal Open Market Committee said interest
rate increases were data-dependent. Further rate increases could
weigh on Treasury prices, as older issuance moves to a discount to
match the higher yields of new bonds.
Traders in the Fed fund futures markets nonetheless appeared to
think the mixed economic data would give impetus to the hawkish
side of the Fed's interest-rate setting body. More investors are
betting on one more rate increase by December. Investor
expectations of another rate increase in December rose to 46.6%
after the data release
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)
from 42.8% on Thursday, according to the Chicago Mercantile
Exchange's FedWatch tool.
Elsewhere, the German 10-year benchmark bond, known as the bund,
jumped close to 4 basis points after eurozone economic sentiment
rose in July for a third straight month to set a fresh 10-year
high.
(END) Dow Jones Newswires
July 28, 2017 10:27 ET (14:27 GMT)
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