Treasury Yields Sink as Tepid Inflation Keeps Fed-Cut Bets Alive

(Bloomberg) -- Treasury yields tumbled as traders ramped up wagers that the Federal Reserve will cut interest rates this year despite solid U.S. growth, as inflation shows signs of slowing.

After first-quarter gross domestic product data Friday showed a stronger-than-expected pace of expansion above 3 percent, the benchmark Treasury 10-year yield initially jumped as high as 2.54 percent. The move quickly faded as traders digested the inflation measure in the data, with a key price-pressure gauge coming in lower than projected. The 10-year yield sank below 2.5 percent, and the dollar declined broadly.

“People are gravitating toward the low inflation, with the feeling that we can’t get inflation even with strong growth,” said Peter Tchir, head of macro strategy at Academy Securities. “The headline growth number is also a little deceiving given the components that drove it, such as an inventory build-up and trade, are likely to be temporary.”

Treasury Yields Sink as Tepid Inflation Keeps Fed-Cut Bets Alive

Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data that topped all forecasts in a Bloomberg survey which has a median estimate of 2.3 percent growth. Still, a Fed-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3 percent, well below policy makers’ 2 percent objective.

Money-market traders saw a greater chance after the report that the Fed will cut rates this year, with about a full quarter-point reduction now priced in, given the implied rate on the January 2020 fed funds futures contract. At the close Thursday, the contract had just under one full quarter-point hike factored in.

The Bloomberg dollar index fell about 0.1 percent on Friday. Haven-related buying amid signs of slowing global growth had buoyed the dollar this year, with the greenback on Thursday touching its highest level this year.

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