US Treasury yields fell on Friday as Catalonia's parliament declared independence from Spain and as reports emerged that President Donald Trump favoured Federal Reserve Governor Jerome Powell to lead the US central bank. The news overshadowed a report showing the US economy grew more than expected in the third quarter, showing resilience despite the impact of Hurricanes Irma and Harvey.
US two-year note yields had risen to fresh nine-year highs after the advance data on the country's gross domestic product. US benchmark 10-year yields also rose after the report. Yields, however, started moving lower following news Catalonia had openly defied the Spanish government with its parliament passing a motion to break away from Spain. Still, Spain was prepared to impose direct rule over the region.
Yields declined further after Bloomberg reported Trump was leaning toward Powell as the next Fed chairman. "Traders became more cautious as they saw the political unraveling of Catalonia and perceived lower odds for John Taylor to get the nod to chair the Federal Reserve Board," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
Powell was viewed as less hawkish than the Stanford University economist Taylor and therefore was expected to continue the current Fed path of gradually raising interest rates. On Thursday, Politico reported that current Fed Chair Janet Yellen was out of the running.
Data also showed early Friday that US gross domestic product grew at a 3.0 percent annual rate in the third quarter after expanding 3.1 percent in the second. Economists polled by Reuters had forecast the economy to grow 2.5 percent in the quarter through September. The GDP news initially sparked a sell-off in Treasuries, pushing yields higher. The data cemented expectations the Fed will raise interest rates in December.
The Federal Open Market Committee will meet next week and is likely to be a non-event. However TD Securities in a research note said there could be two-sided risks to the meeting in the form of more cautious language on the inflation outlook, or a signal of an imminent rate hike in December. In late trading, US two-year note yields fell to 1.595 percent, from Thursday's 1.619 percent. Earlier, two-year yields rose to a nine-year peak of 1.639 percent after the GDP data.
US 10-year US Treasury yields were at 2.419 percent, down from 2.454 percent late Thursday. Earlier in the session, 10-year yields hit a new seven-month peak of 2.477 percent. US 30-year bond yields were also down at 2.930 percent, from 2.961 percent on Thursday.