April 26, 2019 / 6:40 PM / a month ago

TREASURIES-Yields fall as weak inflation data outweigh headline GDP boom

(Recasts, updates yields)

By Kate Duguid

NEW YORK, April 26 (Reuters) - U.S. Treasury yields fell following Friday’s first-quarter growth report as weak inflation data tempered the strong headline figure.

Gross domestic product increased at a 3.2% annualized rate in the first quarter, the Commerce Department said in its advance GDP report released on Friday, versus the 2.0% estimated by economists polled by Reuters.

But Federal Reserve officials are likely to shrug off the surge in growth and focus on a measure of domestic demand that excludes trade, inventories and government spending, which increased at only a 1.3% rate, the slowest since the second quarter of 2013, after increasing at a 2.6% pace in the October-December quarter.

The Fed is also likely to focus on the disappointing core personal consumption expenditure price index figure, which increased at only a 1.3% rate versus 1.8% in the prior quarter. PCE is the Fed’s preferred metric of inflation.

The Federal Open Market Committee is scheduled to meet next week to discuss interest rate policy.

“From a Treasury perspective, the Fed is going to focus on the inflation number,” which is why yields fell, said Stan Shipley, strategist at Evercore ISI. “Offsetting the GDP growth was the GDP deflator, which was 0.9%.”

The Fed recently suspended its three-year monetary policy tightening campaign, dropping forecasts for any interest rate hikes this year. The U.S. central bank increased borrowing costs four times in 2018.

At present, 41.4% of traders predict that the Fed will have cut interest rates 25 basis points by the end of the year, according to CME Group’s FedWatch tool, while 33.7% believe rates will stay where they are, down from 41.8% on Thursday.

The details of the growth figures also detracted from the headline gain: first-quarter GDP owed its outperformance to trade and the largest accumulation of unsold goods since 2015, temporary factors that are likely to reverse in the coming quarters.

“While the consumer did pull back from their torrid holiday buying in the fourth quarter, trade and inventory rebuilding added an outsized 1.7% to GDP. GDP was expected to be 2.3% and without the boost from trade and inventory, GDP would have actually missed,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors.

Yields across maturities were lower, with the biggest losses at the short end of the curve. The two-year yield, a proxy for investor expectations of interest-rate hikes, was last down 3.8 basis points to 2.292%. The benchmark 10-year government note yield was last 2.5 basis points lower at 2.509%. (Reporting by Kate Duguidd; editing by Jonathan Oatis and Rosalba O’Brien)

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