Contracting U.S. Economy Is Good News For Treasurys

Politics Dow Jones Newswires

The Treasury market drew strong demand Friday, driving yields lower, on a report showed that the U.S. economy contracted in the first three months of the year for the second straight year.

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Bad news has been a boon to the bond market because it usually compels investors to shed riskier assets in favor of havens, like Treasurys.

But the market's reaction to the negative revision of first-quarter gross domestic product was in fact less pronounced, as economists had forecast a sharper contraction.

"A lot of us are breathing a sigh of relief...the general sense is that a lot of this has already been priced into the [Treasury] market," said Putri Pascaly, credit strategist and portfolio manager at PAAMCO.

The revision of GDP growth to negative 0.7% revision was in fact better than the negative 1% that economists polled by MarketWatch expected -- while still a big drop from the original reading of positive 0.2%.

The bleak report might mean that the Federal Reserve could postpone raising interest rates for the first time in almost a decade to the end of this year or even early 2016, Pascualy said.

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"In any case Fed officials have indicated that it will be a slow and gradual increase," she added.

The yield on the 10-year benchmark Treasury note was down 1.6 basis point to 2.114% on the day, according to data from Tradeweb.

The yield on the two-year note declined 0.8 basis point to 0.617%, and the 30-year bond yield fell 2.2 basis point to 2.864%.

Treasury yields fall when prices rise, and vice versa.

Treasury prices were supported further by a disappointing reading of the Chicago PMI (http://www.marketwatch.com/story/chicago-pmi-falls-back-into-negative-territory-in-may-2015-05-29)along with a consumer-sentiment index by the University of Michigan (http://www.marketwatch.com/story/may-umich-sentiment-falls-to-907-a-six-month-low-reports-say-2015-05-29) that fell to a six-month low.

On the international front, bond markets remain focused on the Greek debt negotiation saga, which fuels flight-to-safety flows, as no deal is yet in sight for the cash-strapped country and its creditors.

Greece faces four IMF loan-repayment deadlines in the space of two weeks beginning June 5 and totaling 1.5 billion euros ($1.63 billion).

After a flurry of conflicting reports over the past two days on whether a deal was imminent or still far away, the 10-year Greek benchmark yield showed intraday moves as wide as 67 basis points. On Friday the yield was up 16.4 basis points to 11.285%.

"The 'Deal' or 'No Deal' description of negotiations between Greece and its creditors is becoming tedious," Mike O'Rourke, chief market strategist at JonesTrading, said in a note.