BOND REPORT: Treasury Yields Rise As U. S.inflation Exceeds Fed Target

Core PCE inflation for the first quarter hits 2.0%

Treasury yields rose Friday as investors looked past a weak first-quarter U.S. growth to focus on a rise in the Federal Reserve's favorite inflation measure, heightening expectations of a June rate increase.

The yield on the 10-year Treasury note rose 3.3 basis points to 2.331%. Bond prices move in the opposite direction of yields; one basis point is one hundredth of a percentage point.

The yield on the 2-year note rose 1.6 basis points. While the yield on the 30-year bond, or the long bond, rose 2.6 basis points to 2.993%.

The selloff in Treasurys came after the Commerce Department reported that the personal-consumption expenditures, or PCE, index rose at a 2.4% annual pace in the first quarter, topping the central bank's target of 2% for the first time in several years. Core PCE, which strips out food and energy, however, was little changed at 2%.

The yield curve, as measured by the spread between the 2- and 10-year Treasury yields, steepened by as much as 2.6 basis points in morning trading. Higher inflation can corrode the value of future interest payments, leading investors to demand a higher yield for longer maturities.

Before the data release, traders and investors were calling the end of the reflation trade, as disappointing economic data and Trump's inability to push his pro-growth agenda through Congress pared down prospects of higher growth and inflation.

The Commerce Department said the U.S. economy grew at a 0.7% annual pace in the first three months of the year. Economists surveyed by MarketWatch had forecast 0.9% growth.

Market strategists said seasonal weakness could be blamed for the subpar growth. Investors were apprehensive the economy was slowing as the Atlanta Fed GDP tracker had predicted 0.2% growth for the first quarter.

"I get the sense the market reaction is relief that the GDP reading met the consensus after the Atlanta Fed GDP tracker was lower. [First quarter GDP growth] came in line with the market consensus ," said Subadra Rajappa, head of U.S. rates strategy at Société Générale. "Once you see a number on the consensus, you saw the market sold off after that."

The economic report was more mixed than bond trading suggested. Consumer spending posted the smallest gain since 2009, as Americans cut spending on cars, gas, clothes and utilities. Government expenditures fell 1.7%, the largest drop in four years.

See: U.S. economy bogs down in first quarter with slowest growth in 3 years ().

The University of Michigan's Consumer Sentiment indicator will come out on 10:00 a.m.

Two Fed speakers are on the docket for Friday. Federal Reserve Governor Lael Brainard will give a speech on "Fintech and the Future of Finance" in Evanston, Illinois at 1:15 p.m. Eastern. And Philadelphia Fed President Patrick Harker, a voting member of the central bank's interest-rate setting committee, will speak at 2:30 p.m.

(END) Dow Jones Newswires

April 28, 2017 10:01 ET (14:01 GMT)