July 30, 2014 / 6:56 PM / 4 years ago

TREASURIES-Yields surge on strong growth, few surprises from Fed

* Two-year, three-year note yields highest in three years
    * Solid GDP data sparks strong sell-off
    * Little new information in Fed statement
    * Friday's payroll data next major focus

    By Karen Brettell
    NEW YORK, July 30 (Reuters) - U.S. Treasuries yields surged
on Wednesday and two- and three-year note yields rose to their
highest in three years after data showed solid U.S. economic
growth, though the Federal Reserve said it is in no rush to
raise interest rates.
    The U.S. central bank pressed ahead with its plan to wind
down its bond-buying stimulus and upgraded its assessment of the
U.S. economy. It also reiterated that it would likely keep rates
near zero for a "considerable time" after its bond buying ends
and restated that an "accommodative" policy was needed.
    The statement came after data earlier on Wednesday showed 
second-quarter gross domestic product expanded at a 4.0 percent
annual rate as activity picked up broadly, after shrinking at a
revised 2.1 percent pace in the first quarter. Previously,
first-quarter output was estimated to have shrunk 2.9 percent. 
    The GDP data increased expectations that the Fed is moving
closer to an interest rate hike that many expect will occur next
year if the economy continues to gain momentum.
    Expectations are also building that the Fed may adopt a more
hawkish tone and offer more details about its exit strategy when
it meets next in September, even after Wednesday's statement
showed little new information.
    "We will be expecting more of a hawkish stance in
September," said Aaron Kohli, an interest rate strategist at BNP
Paribas in New York. "These kinds of numbers should encourage
the Fed to be much more assertive."
    Two-year and three-year note yields, which are among the
most sensitive to interest rate changes, rose to their highest
levels in more than three years. 
    Two-year notes yields rose as high as 0.58
percent, the highest since May 2011. Three-year note yields
 increased to a high of 1.06 percent, the highest
since April 2011.
    Benchmark 10-year notes yields rose as high as
2.57 percent, the highest since July 16, and up from 2.47
percent before the data was released.
    Some saw the bond move as overstated, however, with the U.S.
economy still expanding at only a moderate pace.
    "The reality is that we are still stuck in a 2.0 percent to
2.5 percent growth rate. I think this has less to do with data
than it does to positioning, et cetera," said Tom Porcelli,
chief U.S. economist at RBC Capital Markets in New York.
    The Fed did, however, take a modestly more hawkish tone on
Wednesday in its wording around inflation, Porcelli noted. "They
basically diminished this whole notion of disinflation in their
    The next major focus will be Friday's jobs report for July.
    U.S. companies hired 218,000 workers in July, short of what
analysts projected and below the previous month's level, a
report by a private payrolls processor showed on Wednesday.

 (Reporting by Karen Brettell; Editing by Bernadette Baum and
Dan Grebler)
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