Treasury Yields Edge Lower

By Akane Otani Features Dow Jones Newswires

U.S. government bond yields edged lower Friday after data showed U.S. economic growth picked up in the second quarter of the year.

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The yield on the 10-year U.S. Treasury note was recently at 2.305%, according to Tradeweb, compared with 2.312% on Thursday. Yields rise as bond prices fall.

Yields pared early gains after the Commerce Department said gross domestic product rose at a 2.6% annual rate in the second quarter, just below the 2.7% that economists surveyed by The Wall Street Journal had expected. The reading was a rebound from the first quarter, when GDP grew at a disappointing 1.2% rate.

Still, data continues to suggest tepid inflation -- something that could keep pressure off government bond prices in the coming months. The employment-cost index for civilian workers, a broad gauge of U.S. wages and benefits, advanced by a seasonally adjusted 0.5% in the second quarter, the Labor Department said Friday, less than the 0.6% rate economists expected and a slowdown from the first quarter.

In recent weeks, central banks have suggested they would be cautious about tightening monetary policy if inflation data continues to come in soft. Investors typically consider inflation one of the greatest threats to long-term bonds, because it erodes the purchasing power of their fixed payments.

"While growth was reasonable, the absence of inflation pressures is more concerning and certainly doesn't point to any urgency for the Fed to hike again later this year," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a note.

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Fed-funds futures show investors see a roughly 44% chance of the Fed raising rates by the end of the year, down from 54% a month ago, according to data from CME Group.

Higher interest rates tend to weaken demand for outstanding government bonds.

Friday's moves put U.S. government bond yields on course for a weekly gain after two weeks of declines. Yields rose sharply at the end of June, as investors expressed concerns that central banks around the world were heading toward dialing back stimulus efforts put in place after the financial crisis.

More recently, however, comments from officials including Fed Chairwoman Janet Yellen acknowledging recent weakness in inflation helped assuage those concerns, sending yields off the highs they hit at the start of the month.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

July 28, 2017 11:26 ET (15:26 GMT)