Yields fall on weak inflation data, shrug off GDP reading

NEW YORK: US Treasury yields fell following Friday's first-quarter growth report as weak inflation data tempered the strong headline figure.

Gross domestic product increased at a 3.2pc annualized rate in the first quarter, the Commerce Department said in its advance GDP report released on Friday, versus the 2.0pc estimated by economists polled by Reuters.

But Federal Reserve officials are likely to shrug off the surge in growth last quarter and focus on a measure of domestic demand that excludes trade, inventories and government spending, which increased at only a 1.3pc rate, the slowest since the second quarter of 2013, after increasing at a 2.6pc pace in the October-December quarter.

The Fed is also likely to focus on the disappointing core personal expenditures consumption price index figure, which increased at only a 1.3pc rate versus 1.8% in the prior quarter. PCE is the Fed's preferred metric of inflation.

"From a Treasury perspective, the Fed is going to focus on the inflation number," which is why yields fell, said Stan Shipley, strategist at Evercore ISI. "Offsetting the GDP growth was the GDP deflator, which was 0.9pc."

The Fed recently suspended its three-year monetary policy tightening campaign, dropping forecasts for any interest rate hikes this year. The US central bank increased borrowing costs four times in 2018.

At present, 40.9pc of traders predict that the Fed will have cut interest rates by 25 basis points by the end of the year, according to CME Group's FedWatch tool. Yesterday, 41.8pc of traders believed rates would stay where they are through December. Now, that number is 35.5pc.

What's more, the higher-than-expected GDP figure owed its outperformance to trade and the largest accumulation of unsold goods since 2015, temporary factors that are likely to reverse in the coming quarters.

"While the consumer did pull back from their torrid holiday buying in the fourth quarter, trade and inventory rebuilding added an outsized 1.7pc to GDP. GDP was expected to be 2.3pc and without the boost from trade and inventory, GDP would have actually missed," said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors.

Yields across maturities were lower, with the biggest losses at the short end of the curve.

The two-year yield, a proxy for investor expectations of interest-rate hikes, fell 4.4 basis points, last at 2.286pc. The benchmark 10-year government note yield was last 3.2 basis points lower at 2.502pc.