Bond Report: 2- and 10-year Treasury yields end at highest since March after revised first-quarter U.S. GDP

Two- and 10-year Treasury yields finished at their highest levels in more than three months on Thursday, after revised data showed the U.S. economy grew faster than previously reported during the first quarter.

What happened

  • The yield on the 2-year Treasury

    soared 15.6 basis points to 4.876% from 4.720% on Wednesday. That’s the largest one-day advance in almost four weeks.

  • The yield on the 10-year Treasury BX:TMUBMUSD10Y jumped 14.2 basis points to 3.853% from 3.711% Wednesday afternoon. That’s the largest one-day advance since March 27.

  • Thursday’s levels are the highest for the 2- and 10-year rates since March 9, based on 3 p.m. figures from Dow Jones Market Data.

  • The yield on the 30-year Treasury

    rose 10.9 basis points to 3.912% from 3.803% late Wednesday. That’s the largest one-day advance since May 1, and Thursday’s level is the highest since June 13.

What drove markets

Data released on Thursday showed that the U.S. economy grew at a solid 2% annual rate in the first quarter versus an earlier estimate of 1.3%, based on updated figures.

Meanwhile, initial weekly jobless claims dropped to a one-month low of 239,000 last week from a revised 265,000 in the prior week, a sign that the U.S. labor market remains fairly robust. Pending home sales fell by 2.7% in May from the previous month, though demand for homes remained strong.

Thursday’s reports paint a picture of an economy that’s defying expectations for a downturn, despite the Federal Reserve’s series of interest-rate hikes from March 2022 through last month to combat inflation.

During an appearance in Spain on Thursday, Fed Chairman Jerome Powell largely reiterated his hawkish message from Wednesday. “In the beginning, there was a little risk of overdoing it and a lot of risk of underdoing it. As you get closer and closer to where you think you’re going to your destination, those risks begin to become more into balance,” Powell said. “I wouldn’t say they’re in balance yet.”

Markets are pricing in an 89.3% chance of a quarter-of-a-percentage-point rate hike on July 26, which would lift the fed funds rate target to between 5.25%-5.5%, according to the CME FedWatch Tool. Traders see a 25% chance of another move of that size in September, up from 16.4% a day ago.

Market-based expectations for inflation increased on Thursday. The 5-year rate on Treasury inflation-protected securities rose to 2.004% as of 3 p.m. New York time from Wednesday’s close of 1.862%, according to Tradeweb. Thursday’s level is the highest since mid-December of 2008, when the 5-year TIPS rate closed at 2.036%.

Source: Tradeweb.

What analysts are saying

“Despite rising borrowing costs, the latest read of housing market metrics suggests ongoing resilience,” said Stifel, Nicolaus & Co. economists Lindsey Piegza and Lauren Henderson, citing recent upticks in construction activity, sales, and prices.

“This suggests the Fed may have significantly more work to do before successfully tamping down activity and restraining the housing market enough to cool topline growth and by extension, tame inflation,” the economists wrote in a note.


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