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BOND REPORT : Treasury Yields Hold The Line After Weak Inflation Supports Calls For Fed Rate Cut

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07/26/2019 | 03:49pm EDT

By Sunny Oh

Second-quarter growth comes in at 2.1%, down from 3.1%

U.S. Treasury yields came off session highs late Friday, trading mostly flat, after the U.S. government reported economic growth had not slowed as much as expected in the second quarter, according to the first official reading of GDP data for the period.

Still, subdued inflation underlined the case for an interest-rate cut by the Federal Reserve next week.

What are Treasurys doing?

The 2-year Treasury note rate rose 1.4 basis points to 1.870%, adding to a weekly climb of 5.7 basis points. The 10-year note yield was up 0.3 basis point to 2.081%, contributing to a weekly rise of 3.3 basis points.

The 30-year bond yield was down 0.5 basis point to 2.600%, trimming its weekly rise to 2.2 basis points. Debt prices move in the opposite direction of yields.

What's driving Treasurys?

The U.S. economy grew at a 2.1% annualized pace in the second quarter, down from 3.1% in the first three months of the year. Economists polled by MarketWatch had forecast the U.S. to grow at around 1.9% annualized pace. Faster economic growth and the implications for fiercer inflationary pressures can weigh on prices for government paper, lifting yields.

But personal consumption expenditure, stripping out for energy and food prices, was weaker than expected at 1.8%, versus analysts' estimates of 2%. The so-called core PCE gauge is seen as the Fed's preferred inflation indicator.

A lack of a resolution of trade tensions with the U.S.'s major trading partners, especially China, continued to cap business investment. On the other hand, household spending was resilient.

Friday's data comes ahead of next week's meeting of the Federal Open Market Committee, its rate-setting body, on July 30-31. Economists anticipate the U.S. central bank to deliver a 25 basis point rate cut.

Late Thursday, the House passed a bill to suspend the debt ceiling and lift federal spending caps. The bill will be handed to the Senate for a vote next week, and then is expected to be signed by President Donald Trump. If passed, the uptick in government spending could help prop up growth in the next few years, said analysts.

What did market participants' say?

"Growth of 2.1% is better than expected, but highly reliant on a surge in household consumption. Investment was weak, as was net trade, which could add to the case for rate cuts at next week's Fed meeting," wrote Charles Seville, co-head of America sovereigns at Fitch Ratings.

"[Recent data] doesn't change the inflation narrative, which is low, but it does change the growth narrative, and especially the idea that a recession is coming anytime soon," said Kevin Giddis, head of fixed income at Raymond James.

Stocks mentioned in the article
ChangeLast1st jan.
RAYMOND JAMES FINANCIAL 2.18% 84.83 Delayed Quote.14.00%
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