US yield curve flattened by global growth doubts

The margin between US shorter-dated Treasury yields and longer-dated ones shrank on Friday on investors' skepticism about the global economy even as the United States fared better than other nations in the first quarter. US gross domestic product, the government's broadest economic gauge, grew at a 2.3 percent annualized pace in the first three months of 2018, slower than the 2.9 percent rate in the prior quarter, the government said. The recent GDP growth came in stronger than the 2.0 percent increase forecast among economists polled by Reuters.
Earlier Friday, Britain posted its weakest quarterly growth in five years, while France's economic expansion slowed more than expected. "The bond market is not believing. It's skeptical about global growth and inflation," said James Camp, managing director of fixed income at Eagle Asset Management at St. Petersburg, Florida.
The 10-year Treasury yield fell 3.1 basis points to 2.959 percent. It reached 3.035 percent on Wednesday, its highest level since January 2014.
Two-year note yield slipped 0.8 basis point to 2.484 percent after it hit 2.508 percent two days ago, which was last seen in September 2008. The gap between two-year and 10-year yields narrowed by 2.4 basis points to 47.3 basis points after reaching 54.6 basis points on Thursday, its steepest level in a month. It remained above the flattest level in over a decade set last week at 41.1 basis points.
Still the smaller-than-expected decline in GDP renewed bets the Federal Reserve would stick to its rate-hike campaign to keep inflation in check, investors said.
Another encouraging sign was a pickup in wage pressure. The government's employment cost index rose 0.8 percent in the first quarter, which was above the prior quarter's 0.6 percent. Relatively solid demand for this week's $96 billion in fixed-rate, coupon-bearing Treasuries reduced jitters about investors' appetite for US government debt. This spurred month-end demand for longer-dated Treasuries, pushing the 10-year yield back below 3 percent.
There have been concerns whether fund managers and foreign central banks may pare their Treasury holdings as the US government is expected to ramp up its borrowing to cover a widening budget gap.
"It contributed to yields moving up, but it's been largely priced into the market," said John Bellows, portfolio manager at Western Asset Management Co. in Pasadena, California. Supply concerns were mitigated by disappointing economic data in Europe and perceived dovish signals from the European Central Bank and Bank of Japan, analysts said.
Nevertheless, investors were not yet loading up on Treasuries ahead of the government's latest projection of its borrowing needs, the Fed's next two-day policy meeting and the Labor Department's April payrolls report, which are scheduled for next week, they said.