- The yield on the benchmark 10-year Treasury notes dropped to 4.128%
- The two-year yield, associated with expectations of higher Fed fund rates, fell to 4.3138%.
- Fourth-quarter US economic growth exceeded expectations, reaching 2.5% for the full year.
Interest futures (ZB) fell on Thursday after a report showed the US economy expanded faster than expected. Additionally, there were indications that inflation was easing. Investors reacted to the faster-than-expected economic growth data by bidding up prices, causing Treasury yields to fall.
Charu Chanana, head of currency strategy at Saxo in Singapore, stated that US GDP data reaffirmed hopes for a soft landing in the US. However, the bond market paid greater attention to the report’s disinflation component, leading to a decline in yields.
The yield on the benchmark 10-year Treasury notes dropped to 4.128% compared to Wednesday’s close of 4.178%. Meanwhile, the two-year yield, associated with expectations of higher Fed fund rates, touched 4.3138% compared to a US close of 4.378%.
The focus has now shifted to upcoming inflation data for clues on the Federal Reserve’s interest rate cut strategy.
US GDP (Source: Bureau of Economic Analysis)
The Commerce Department’s Bureau of Economic Analysis reported a 3.3% annualized growth in GDP last quarter, down from 4.9% in the previous quarter. This growth resulted from increased exports, government spending, and business investment.
The strong economic performance, extending into the new year, suggested the US central bank would likely delay interest rate cuts until the third or fourth quarter of 2024. Despite this, the Fed will likely still cut rates later in the year because inflation cooled.
The market’s primary concern remains inflation and consumer spending. The Fed is expected to keep interest rates unchanged at its upcoming policy meeting on January 31st. The Fed has increased interest rates by 525bps since March 2022. Meanwhile, there is an 89% chance of a rate cut by May, as per the CME FedWatch Tool.
In a separate report, initial claims for state unemployment benefits in the US rose by 25,000 to 214,000 for the week ending January 20. This exceeded economists’ forecast of 200,000 claims. Investors are now awaiting the US personal consumption expenditure (PCE) data scheduled for release on Friday.
Concerns about potential inflationary impacts from attacks on shipping lines in the Red Sea and a drought in the Panama Canal are not a major worry for economists at the moment.
