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Bond Report: Treasury yields turn mostly higher as traders scale back expectations for Fed rate hikes by year-end

Treasury yields turned mixed Thursday morning after revised data showed that the U.S. economy contracted by a deeper-than-expected 1.5% annual rate in the first quarter, although weekly jobless claims reflected a labor market that’s still strong.

What yields are doing

The 10-year Treasury note yield
TMUBMUSD10Y,
2.754%

was at 2.751% versus 2.746% at 3 p.m. Eastern on Wednesday.

The yield on the 2-year Treasury note
TMUBMUSD02Y,
2.488%

was at 2.436% versus 2.50% Wednesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.994%

was at 2.991% compared with 2.965% late Wednesday.

What’s driving the market

Revised data released Thursday shows that the U.S. economy contracted by a deeper-than-expected 1.5% annual pace in the first quarter, largely because of a record trade deficit. That compares with a previously estimated 1.4% drop-off. Corporate profits fell for the first time in five quarters.

Meanwhile, U.S. jobless claims fell by 8,000 last week to 210,000, signaling that layoffs remain extremely low. Economists polled by The Wall Street Journal had expected claims to total 215,000 in the seven days that ended May 21.

Concerns about U.S. growth have caused Treasury yields to pull back from highs set earlier this month, when the 10-year rate briefly topped 3.2% to trade at a roughly 3 1/2-year intraday high. Yields had risen sharply for much of this year as investors focused on inflation and the Federal Reserve’s ability to bring price pressures under control without sinking the economy into recession.

The Fed, which is set to begin unwinding its balance sheet on June 1, delivered a half percentage point rate increase on May 4 following a more traditional quarter-point, or 25 basis point, hike earlier this year. Fed officials had previously signaled at least two more half-point rises are in store.

The Treasury will auction $42 billion in 7-year notes
TMUBMUSD07Y,
2.762%
.

Friday will bring a look at the Fed’s preferred inflation indicator, the core personal-consumption expenditures inflation reading.

What analysts are saying

“The profits drop is a reminder that while most economists, including the Fed staff and FOMC participants, dismissed the contraction in the economy as anomalous or caused by frequently volatile factors or otherwise not important, it was nonetheless real,” said Chris Low, chief economist at FHN Financial. “The drop in corporate profits underscores the reality of the output drop. It reflected a slowdown in inventory investment and weakness overseas, but it was nevertheless real enough to undermine profitability.”

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