Treasury yields end slightly higher after U.S. GDP report, jobless claims Bond Report

By Vivien Lou Chen and Mark DeCambre

U.S. Treasury yields ended slightly higher Thursday as fixed-income investors weighed a report on second-quarter economic growth that showed a substantial recovery from the pandemic but still fell short of expectations.

What yields are doing

The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.55% was at 1.269%, versus 1.259% at 3 p.m. Wednesday. Yields for debt rise as prices fall.
The 30-year Treasury bond rate /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.01% was at 1.916%, compared with 1.910% a day ago.
The 2-year Treasury note yields /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +1.41% dropped to 0.202%, versus 0.209% on Wednesday.

Fixed-income drivers

Data released on Thursday shows that the U.S. economy grew at a blistering pace in the spring and repaired much of the damage caused by the pandemic, thanks to widespread coronavirus vaccinations and a nearly full reopening of businesses. Still, that growth came in below estimates.

Gross domestic product, the official scorecard for the U.S. economy, expanded at a 6.5% annual pace in the second quarter. But economists polled by The Wall Street Journal had forecast an annualized 9.1% increase in GDP.

Weekly jobless benefit claims , a proxy for layoffs, fell after hitting a two-month high, suggesting the delta strain of the coronavirus hasn’t done much so far to harm the economy. Initial jobless claims declined by 24,000 to 400,000 in the week ended July 24, the government said Thursday. The moves for bonds come a day after Federal Reserve officials suggested that the central bank is inching toward scaling back its monthly purchases of $120 billion in bonds, by signaling the process of tapering could begin this year.

Some analysts believe the Fed is setting the stage to start its rollback of accommodative policies by the end of 2021, with the Jackson Hole symposium of central bankers in late August and the Fed’s next policy meeting in late September as events when policy makers may more clearly signal their intentions. But Thursday’s below-forecast GDP report may mean more disappointing growth could be in store, and Fed officials may have already missed the right time to pivot to a more hawkish stance.

See : Strong, but disappointing, U.S. GDP report may be bad news for the Fed

U.S. stock indexes headed higher on Thursday, with the Dow Jones Industrial Average DJIA and S&P 500 Index SPX both up by 0.5%. Hong Kong’s embattled Hang Seng /zigman2/quotes/210598030/delayed HK:HSI -0.05% index finished sharply higher, up 3.3%, after being pressured by a Chinese regulatory crackdown focused on technology companies domiciled in the People’s Republic.

Overseas, Germany’s 10-year yield /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -0.12% , known as the bund, was trading around -0.447%, marking its lowest level since February.

The earlier decline in global yields recently, with 10-year U.S. Treasury yields trading around five-month lows, has been attributed to growing concerns about the strength of the economic recovery from COVID-19, amid a spike caused by the delta variant of the coronavirus.

Moreover, yields adjusted for inflation, or real yields, are trading at or near record lows . The yield on the 10-year Treasury inflation-protected security, or TIPS, fell to as low as -1.175% Thursday.

Treasury’s $62 billion auction of 7-year Treasury notes /zigman2/quotes/211347050/realtime BX:TMUBMUSD07Y +0.75% was “fair,” with “solid underlying stats,” according to BMO Capital Markets strategist Ben Jeffery.

Meanwhile, a bipartisan group of 10 senators reached a deal with the White House to spend $973 billion over five years, and $1.2 trillion if continued over eight years, on a package that would fund infrastructure improvements .

What economists and strategists are saying

“The U.S. yield curve continues to send a gloomy message, which we think is hard to square with the economic outlook,” Jonas Goltermann of Capital Economics writes in a note. “By itself, the flattening yield curve is not all that surprising,” but “what is much harder to justify, in our view, is the fall of long-term yields.”Meanwhile, Dimitri Delis, a senior econometric and macro strategist at Piper Sandler Cos., says long-term U.S. Treasury yields are stuck in a so-called “death cross,” or technical pattern that suggests they may keep falling even lower from here. Read: Benchmark 10- and 30-year U.S. yields are caught in a “death cross” “One of the most frequent client questions we tackle these days is: Why are US interest rates so low and can this persist?” strategist Ralph Axel wrote in a BofA Global Research note. The answer is that markets do not believe the Fed will be able to raise rates very far once the hiking cycle begins, he says.“Rates investors are increasingly skeptical of the Fed’s ability to deliver a repeat of the 2015-2018 hiking cycle which brought the policy rate band to 2.25%-2.50% in December 2018 and a peak 10y rate of 3.2% in November 2018,” Axel wrote.

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