US Treasury debt prices rallied and the yield curve normalised on Friday as a report showing slower economic growth bolstered expectations the Federal Reserve will end its campaign of interest rate increases. The benchmark 10-year yield tumbled to a one-month low at 4.99 percent, before ticking up to close at 5.00 percent.
The yield on the two-year Treasury note, which is more sensitive to expectations on Fed interest rate moves, fell below the 10-year note's yield to normalise the curve. The two-year note rose 4/32 in price to yield 4.99 percent, down 6 basis points from late on Thursday. Bond yields and prices move inversely.
"The bottom line is we're now in a bull market in bonds," said Brian Robinson, bond strategist with 4Cast Ltd in New York. "It's a feeding frenzy."
Benchmark Treasuries posted their fifth straight week of gains and their longest winning streak in nearly three years. US GDP grew only 2.5 percent in the second quarter, below economists' forecasts of 3.0 percent and sharply slower than a 5.6 percent expansion in the first quarter.
"The data today is causing a mind shift. With a 2.5 percent growth number, the Fed cannot tighten interest rates. It would be silly," said Michael Cheah, vice president and portfolio manager with AIG SunAmerica Asset Management in Jersey City.
The bond rally pushed the 10-year and two-year yields to a wide 25 basis points below the 5.25 percent fed funds target rate, indicating some investors were beginning to take a long-term view toward a possible rate cut, one analyst noted.
"The 10-year yield now has moved closer into territory that has historically been consistent with the bond market placing greater odds on a future rate cut than a rate hike," said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co in New York.
When the 10-year note has yielded 50 basis points below the federal funds target rate, the key overnight lending rate between banks, "that has meant a rate cut was imminent," Crescenzi said.
Bond investors trimmed expectations the Fed will raise rates at its next meeting on August 8 to a perceived 27 percent chance from about 49 percent shortly before the GDP report, the interest rate futures market showed. But federal funds futures came off Friday's highs after comments from Donald Kohn, the vice chairman of the Federal Reserve.
In a letter to a congressman, Kohn said that downward pressure on US inflation from low import prices may not persist. The second-quarter price index of core personal consumption expenditures, a gauge of inflation, rose 2.9 percent, the highest quarterly increase since 1994. However, the bond market appeared to ignore signs of rising inflation pressure to focus on slowing economic growth, traders said.
Treasuries hardly moved after the University of Michigan's final consumer sentiment reading for July was a slightly stronger-than-expected 84.7.
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