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Bond Report: Treasury yields rise even after U.S. economy unexpectedly shrinks in first quarter

Treasury yields moved higher for a second straight session on Thursday as traders largely brushed aside data showing the U.S. economy contracted for the first time since the pandemic began two years ago.

Meanwhile, the Treasury yield curve flattened, with the spread between 2- and 10-year yields narrowing to 22 basis points in a market signal of concerns about the outlook further down the road.

What did yields do?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.847%

rose 4.5 basis points to 2.862% from 2.817% at 3 p.m. Eastern on Wednesday. The rate is up 8.9 basis points over the last two trading days, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury yield
TMUBMUSD02Y,
2.641%

advanced 7.1 basis points to 2.648% from 2.577% Wednesday afternoon. The yield is up 10.4 basis points over two straight trading days.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.913%

rose 2.1 basis points to 2.928% from 2.907% late Wednesday. The rate is up 5.9 basis points over the past two sessions.

What’s drove the market?

The U.S. economy shrank 1.4% in the first quarter on an annualized basis, but the decline was mostly due to a record international trade deficit, lower government spending and a decline in inventories. Robust consumer spending and businesses investment signaled the economy was still steadily expanding.

Economists surveyed by The Wall Street Journal, on average, had been looking for the annualized rate of growth to slow to 1% from a hot 6.9% in the final three months of 2021, although some had raised the prospect of a negative figure.

The year-to-date run-up in Treasury yields comes as investors look for the Federal Reserve to move aggressively to raise interest rates and shrink its balance sheet to rein in inflation running at its highest level in more than four decades.

Read: Fed’s half-percentage-point interest rate hike next week seen baked in the cake

Investors are also paying attention to Russia’s invasion of Ukraine, with the war now heading into its third month. Energy-related tensions between Moscow and the West escalated earlier this week, with Russia shutting off natural-gas supplies to Poland and Bulgaria after they refused to make payments in rubles, as demanded by Russian President Vladimir Putin.

In other U.S. economic data, weekly initial jobless claims fell by 5,000 to 180,000 in the week ended April 23, the U.S. Labor Department said Thursday. The decline was in line with forecasts of economists polled by The Wall Street Journal.

Treasury’s $44 billion auction of 7-year notes produced “decent” bidding metrics, according to BMO Capital Market’s Ben Jeffery.

What are analysts saying?

“The latest snapshots of economic data remind us of the volatile and complicated times in which we live,” said Mark Hamrick, senior economic analyst at Bankrate.com. “Forecasts for growth for the full year suggest a better showing in the coming months. The Federal Reserve is seen boosting interest rates as it focuses on historically high inflation, but will continue to watch closely.”
 

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