Second-quarter GDP accelerates, but pace remains subdued
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Long-dated Treasury yields rose for the week as recovering commodity prices, particularly for oil, and some stronger-than-expected economic data raised growth and inflation expectations.
But Friday's bond-buying reversed part of the weeklong trend after a smaller-than-expected pickup in second-quarter economic growth and a lack of accompanying inflation and wage growth raised doubts about the pace of future rate increases by the Federal Reserve.
The yield on the benchmark 10-year Treasury note fell 2 basis points to 2.294%, paring its five-day rise to around 6 basis points. While, the yield on the 30-year Treasury bond, lost more than 3 basis points to 2.895%, cutting a weeklong gain down to 9.3 basis points.
The yield on the 2-year note was flat at 1.351% and recorded little change over the week. Yields rise as debt prices decline.
Treasury yields for longer tenors rose this week after a strong showing from durable good and higher commodity prices fanned growth and inflation pressures. Crude oil logged its biggest weekly gain of the year (http://www.marketwatch.com/story/oil-pauses-ahead-of-us-rig-data-after-logging-nearly-7-gain-for-the-week-2017-07-28) to settle at $49.71 a barrel.
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But yields across the curve fell slightly on Friday after data showed second-quarter gross domestic product accelerated to a 2.6% annual pace, below the consensus forecast of 2.8% by economists polled by MarketWatch. While the number is more than double the revised 1.2% pace seen in the first quarter, it leaves the U.S. economy on a tepid expansion path.
See: U.S. GDP speeds up to 2.6% in 2nd quarter (http://www.marketwatch.com/story/us-gdp-accelerates-to-26-in-second-quarter-2017-07-28)
Though the overall economic report offered notes of optimism, the personal-consumption expenditures index, the Fed's preferred measure of inflation, only notched a gain of 0.3%, a sharp slowdown from 2.2% in the first quarter. While, the latest U.S. employment cost index, a measure of wage pressures, rose 0.5% (http://www.marketwatch.com/story/us-employment-costs-rise-05-in-2nd-quarter-eci-shows-2017-07-28), slightly below forecasts. A trend of easing price pressures but strengthening growth could prove worrisome to economists adhering to the Phillips curve, a theory that ties slack in the labor market to wage growth, and thus, inflation.
"This suggests that even if we're in a lower productivity environment, there has been a breakdown in the transfer mechanism between wage growth and realized inflation," noted Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.
A lack of inflation offered fodder for the bond bulls as they engaged in modest buying after the data's release. Higher consumer prices can have a corrosive effect on the fixed-payments of government paper.
The release of the Fed policy statement midweek strengthened market sentiment that the balance sheet reduction would start in September, but analysts say the prospect for another rate increase this year remains uncertain.
"The market has lost a little faith that the Fed can raise rates, the dot plot has adjusted more to market expectations," said Andrew Chan, a portfolio strategist at First Foundation Advisors, referring to a graph of Fed policy makers' individual projections for future interest rates.
Traders in the Fed fund futures markets nonetheless appeared to think the mixed economic data would give impetus to the hawkish elements of the Fed's interest-rate setting body. More investors are betting on one more rate increase by December. Traders' expectations of another rate increase in December rose to 44.6% after the data release (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html) from 42.8% on Thursday, according to the Chicago Mercantile Exchange's FedWatch tool.
But small changes in futures data can be deceptive as the market is thinly traded, said Marvin Loh, fixed-income strategist for BNY Mellon.
Elsewhere, the German 10-year benchmark bond, known as the bund, jumped close to 4 basis points to 0.540% after eurozone economic sentiment rose in July for a third straight month to set a fresh 10-year high.
(END) Dow Jones Newswires
July 28, 2017 16:33 ET (20:33 GMT)