By Vivien Lou Chen and William Watts
Treasury yields were mixed on Thursday after revised data showed the U.S. economy contracted more deeply than expected in the first quarter and traders pared their 2022 outlook for more Federal Reserve interest rate hikes.The 2-year yield, which is mostly associated with the path of near-term Fed policy, fell. Meanwhile, yields across the rest of the curve were little changed to slightly higher, partly on the view that policy makers might not need to keep delivering aggressive rate hikes through year-end that could send the economy into a recession.
What yields are doing
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +4.63% rose 1 basis point to 2.756% from 2.746% at 3 p.m. Eastern on Wednesday. The yield is up 126 basis points this year, according to Dow Jones Market Data.
The yield on the 2-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +5.47% declined 1.4 basis points to 2.486% versus 2.50% Wednesday afternoon.
The 30-year Treasury bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +2.76% rose 2.6 basis points to 2.991% from 2.965% late Wednesday.
What’s driving the market
Revised data released Thursday showed that the U.S. economy contracted by a deeper-than-expected 1.5% annual pace in the first quarter, largely because of a record trade deficit. That compares with a previously estimated 1.4% drop-off. Corporate profits fell for the first time in five quarters.Meanwhile, U.S. jobless claims fell by 8,000 last week to 210,000, signaling that layoffs remain extremely low. Economists polled by The Wall Street Journal had expected claims to total 215,000 in the seven days that ended May 21. An index of pending home sales slumped 3.9% in April and fell for the sixth month in a row, signaling a sharp slowdown in the real estate market.
Financial markets appeared to conclude from the GDP report that the central bank could back off somewhat on continued aggressive rate increases, leading all three major stock indexes to remain higher into the final hour of trading on Thursday. Fed-funds futures traders pulled back on their expectations for continued rate hikes. They’re now placing a 57% chance on the fed-funds rate target getting between 2.5% and 2.75% by December, up from 35% a week ago, according to the CME FedWatch Tool . The likelihood that policy makers will get to a target between 2.75% and 3% by year-end, from a current level between 0.75% and 1%, dropped to 34% from 51% on May 19.The Fed, which is set to begin unwinding its balance sheet on June 1, delivered a half percentage point rate increase on May 4 following a more traditional quarter-point, or 25 basis point, hike earlier this year. Fed officials have signaled at least two more half-point rises are in store. Meanwhile, the U.S. forward rates market is producing a clear, broadening sign of a potential Fed policy mistake, strategists at JPMorgan Chase & Co. wrote on Thursday.
Friday will bring a look at the Fed’s preferred inflation indicator, the core personal consumption expenditures price index.
What analysts are saying
“While the near-term increases in policy rates are unlikely to be altered by the recent correction in risk assets, the forward path of hikes has just become more uncertain,” BMO Capital Markets strategists Ian Lyngen and Ben Jeffery wrote in a note. “After all, if stocks cannot handle the first 75 bp of aggregate hikes, how much lower will valuations drift once the Fed moves beyond neutral into truly restrictive territory?“It’s this uncertainty that has been driving discussions across financial markets,” they said.