US Treasury yields under pressure after GDP data

  • A better-than-expected reading on GDP was accompanied by the weakest performance in consumer spending in nearly five years.
  • "You're seeing some indications of wages pressure, but the translation of that into overall pricing pressures is missing," said Aaron Kohli, rates strategist at BMO Capital Markets.

U.S. government debt yields slipped Friday after weak consumer spending data muted a better-than-expected initial first-quarter read on economic growth.

The relative calm on the week's final day of trading comes after several sessions of activity in the debt markets. The yield on the benchmark 10-year Treasury note hit the key psychological level of 3 percent Tuesday for the first time since January 2014.

The yield, a barometer for mortgage rates and other financial instruments, has jumped in April on signs of nascent inflation and as the Federal Reserve stood by its plan to gradually tighten monetary policy. A move in the yield above 2.9 percent in February triggered a correction for U.S. stocks.

On Friday, the initial reading on first-quarter gross domestic product was 2.3 percent, a broad indicator of the health of the economy, ahead of consensus estimates of 2 percent, according to economists polled by Thomson Reuters. The better-than-expected figure came despite the weakest performance in consumer spending in nearly five years.

Growth in consumer spending, representing two-thirds of U.S. economic activity, slid to 1.1 percent rate in the first quarter, the slowest pace since the second quarter of 2013 and following the fourth quarter's robust 4.0 percent growth rate. That fall is likely related to lackluster inflation numbers, according to BMO Capital Markets rates strategist Aaron Kohli.

"I think part of it is the inflation story. You're seeing some indications of wages pressure, but the translation of that into overall pricing pressures is missing," said Kohli. He added that part of the explanation could be that many working-age people are still not participating in the labor market.

"While the unemployment rate has fallen, you can make the case that there a shadow pool of people" on the sidelines," he said. "We just can't seem to get wages to go up as fast as we hope."

Following the report, the yield on the benchmark 10-year Treasury note was lower at around 2.959 percent at 3:46 p.m. ET, while the yield on the 30-year Treasury bond was lower at 3.128 percent. Bond yields move inversely to prices.

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The rise in rates throughout 2018 has become a divisive issue on Wall Street. Some see higher rates as a vote of confidence on the strength of the economy, while others consider increased borrowing costs a threat to the bull market that began amid — and was fueled by — historically low rates and extraordinary Fed stimulus.

There are no speeches by Federal Reserve members scheduled for today. The Bank of Japan decided to hold off on changing its monetary policy stance, at its latest meeting, following the European Central Bank's decision to hold its own interest rates steady Thursday. The Central Bank of Russia is scheduled to have a monetary policy meeting on Friday.

In politics, the leaders of South Korea and North Korea met at the border between the two countries on Friday for historic face-to-face talks. The talks are expected to ease tensions between the two nations, with the two leaders on Friday having pledged to remove the risk of war and collaborate in order to secure complete denuclearization of the Korean Peninsula.

German Chancellor Angela Merkel is scheduled to meet with the Donald Trump administration in Washington. The two leaders are expected to talk about a number of subjects including geopolitical and economic issues that face the world.