TREASURIES-U.S. yields lower after GDP data, Fed comments

BY Reuters | ECONOMIC | 11/29/23 10:42 AM EST

NEW YORK, Nov 29 (Reuters) - U.S. Treasury yields were lower on Wednesday, with the benchmark 10-year Treasury note on track for a third straight session of declines, as the latest reading on economic growth failed to derail market expectations that a Federal Reserve rate cut was on the horizon.

Gross domestic product increased at a 5.2% annualized rate last quarter, revised up from the previously reported 4.9% pace, and the fastest pace of expansion since the fourth quarter of 2021, the Commerce Department's Bureau of Economic Analysis said in its second estimate of third-quarter GDP. However, the effect of borrowing costs on the labor market and spending appear to have stalled momentum.

"The GDP numbers were good, but a mess," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin. "The data are mostly noise with very little signal, but it's clear that investors are looking at this with the attitude of, 'Yeah, but what's next?' Growth is likely going from great, to good, to mediocre over the next couple of quarters."

The yield on 10-year Treasury notes declined 6 basis points to 4.271% after falling to 4.253%, its lowest since Sept 14.

Softening economic data, including a reading on inflation two weeks ago, has heightened expectations that the Fed will hold rates at their current level, while projecting a greater likelihood the central bank will need to cut rates in the coming months.

Markets are pricing in a nearly 80% chance that the Fed will cuts rates by at least 25 basis points in May, according to CME's FedWatch Tool, up from about 65% on Tuesday. Projections for a March cut of at least 25 basis points have also grown and are now showing a better than 50% chance compared with a roughly 35% chance the prior day.

The yield on the 30-year Treasury bond fell 7 basis points to 4.458%.

Yields fell on Tuesday after Fed Governor Christopher Waller, seen as a hawkish member of the central bank, flagged the possibility of a rate cut if inflation continues to decline.

On Wednesday, Federal Reserve Bank of Atlanta President Raphael Bostic said he expects U.S. growth to slow and inflation to continue to ease on the back of tight monetary policy, although Richmond Fed President Thomas Barkin, a non-voting member of the central bank, said talking about rate cuts is "premature."

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 8 basis points to 4.652% after touching 4.608%, its lowest level since July 13.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 38.3 basis points, up from a negative 52.62 on Tuesday.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.159% after closing at 2.173% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.223%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Will Dunham)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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