NEW YORK: US Treasury yields advanced on Thursday, as investors shrugged off weaker-than-expected US economic growth data and focused instead on the inflation components of the report, as well as a solid jobless claims number.
US yield curves flattened again amid heightened expectation of a rate hike by the Federal Reserve next year, with the gap between 5-year and 30-year yields narrowing to 73.4 basis points, it’s tightest since March 2020.
Another key yield curve showing the spread between 2-year and 10-year yields was also flatter on the day. That spread fell below 100 basis points for the first time since early August. The spread was last at 102.6 basis points.
In a sign of market uncertainty, the US 20-year and 30-year yields inverted on Thursday. US 20-year yields were last up nearly 5 basis points at 1.9720pc, while those on the 30-year was up nearly 2 basis points at 1.9596pc.
"The 20/30-year yield inversion is just a function of the overall yield curve flattening. The 20-year is a basket of securities that traded quite cheaply back in the 1980s," said Tom di Galoma, managing director at Seaport Global Holdings. "We may be getting back to that scenario. And I just think there are more buyers of the 30-year than the 20-year."
Treasury prices extended losses after the US 7-year note auction showed a high yield of 1.461pc, higher than the expected bid at the deadline, suggesting investors demanded a higher premium to hold the note.
US long-dated yields fall to one-week lows; 2-year note auction well-received
Overall, analysts said the results were solid, particularly the decent uptake from non-dealers.
The weak US gross domestic product report, which showed the world's largest economy grew at a slower-than-expected 2.0pc annualized rate last quarter, had little impact on US yields.
The soft GDP figure, the weakest since the second quarter of 2020, was offset by continued improvement in US jobless claims, which dropped to 281,000 last week, the lowest since mid-March 2020. It was the third straight week that claims remained below the 300,000 threshold.
"The Treasury market has discounted the weak GDP release and focused on the GDP and core PCE deflators, which are improving," said Stan Shipley, fixed income strategist at Evercore.
The GDP deflator measures changes in the prices of US goods and services and helps analysts compare the levels of yearly real economic activity. The core PCE deflator, on the other hand, is a gauge of domestic inflation.
"People are also looking at the jobless claims numbers and saying that we could actually get a good jobs report next week," Shipley added.
The US GDP number did little to change market expectations of a Fed lift-off in the summer next year. Fed funds futures have priced in a more than 80pc chance of a rate hike in June 2022, fully pricing that scenario by July
In afternoon US trading, the benchmark US 10-year yield was up nearly 4 basis points at 1.5650pc.
US 2-year yields hit a fresh 19-month high of 0.5640pc, and were last up less than a basis point at 0.499pc.
The US 5-year yield, another part of the curve that is sensitive to Fed rate expectations, was up nearly 4 basis points at 1.1799pc.
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