Treasury yields finished broadly lower on Thursday despite an unexpectedly strong preliminary fourth-quarter reading on U.S. economic growth, as traders focused on the likelihood of falling inflation.
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell 6.4 basis points to 4.312%, from 4.376% on Wednesday. Thursday’s level is the lowest since Jan. 16, based on 3 p.m. Eastern time figures from Dow Jones Market Data. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
dipped 4.7 basis points to 4.131%, from 4.178% on Wednesday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
eased 3.3 basis points to 4.380%, from 4.413% on Wednesday.
What drove markets
Treasury yields fell on Thursday in sympathy with market rates in Europe, where traders were skeptical that the European Central Bank can keep interest rates unchanged. Driving much of Thursday’s action in bond markets was the idea that inflation will keep falling, policymakers in the U.S. and overseas will likely be unable to avoid rate cuts, or some combination of both, traders said.
Back in the U.S., many in the bond market remained focused on the chances of falling inflation and chose to look past Thursday’s fourth-quarter U.S. GDP report, which showed that the world’s largest economy grew at a 3.3% annual rate that came in above economists’ estimates.
Other U.S. data on Thursday showed that initial jobless claims ticked up by 25,000 to 214,000 for the week that ended Jan. 20, durable-goods orders were flat in December, and the U.S. trade deficit in goods narrowed to $88.5 billion last month.
Treasury’s $41 billion auction of 7-year notes produced “good” statistics, albeit with a small concession, as bidding by non-dealers came in at an above-average 86.1%, said BMO Capital Markets strategist Vail Hartman.
Markets priced in a 97.4% probability that the Federal Reserve will leave interest rates unchanged at its policy meeting next Wednesday, according to the CME FedWatch Tool. The chance of no action again by March, which would keep rates between 5.25%-5.5%, was seen at 50.7%. However, fed-funds futures traders continued to mostly expect five or six quarter-point rate cuts by December.
On Friday, the Fed’s favored inflation gauge, the personal-consumption expenditures price index, will be released for December. Economists expect the core PCE index, which excludes food and energy, to have increased by 3% year over year, easing from 3.2% the previous month.
What analysts are saying
Those hunting for clues that the Federal Reserve is ready to cut interest rates “will be sorely disappointed,” said analyst Sophie Lund-Yates of Hargreaves Lansdown.
“The U.S. economy has shown remarkable resilience in the face of higher interest rates and soaring inflation, with consumer spending once again being a driver of GDP growth,” Lund-Yates wrote in an email. “This comes despite a stark burn rate on excess savings and sharp jumps in the amount people are paying on personal loans, rather than mortgages. The U.S. public is absorbing far more shocks than expected, but that’s not to say the storm will blow over without consequence.”
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