By Cynthia Lin
Treasury prices gained Thursday as investors kept their optimism
about the U.S. economy in check despite a solid headline reading on
last quarter's growth.
In midday trading, benchmark 10-year notes gained 6/32 in price
to yield 2.301%, according to Tradeweb. Two-year notes rose 1/32 to
yield 0.473%, while the 30-year bond advanced 10/32 to yield
3.031%. Bond yields decline when prices rise.
Those gains came despite the U.S. reporting that gross domestic
product grew 3.5% in the third quarter, surpassing expectations.
Investors felt details to the report were less rosy, with typically
volatile spending on defense boosting the reading, while the price
index continued to show a lack of inflation.
"The internal mix of the GDP report was not as good as the
headline suggests," said Andres de Lasa, a government bond trader
at Pierpont Securities, adding that prices are reverting a bit
higher after Wednesday's decline.
Mr. De Lasa said last session's declines came as investors
placed new bets against Treasurys, particularly around the two- and
five-year maturities, after a policy statement by the Federal
Reserve showed increased optimism about the U.S. economy. While the
central bank maintained that it will wait a "considerable time"
before raising rates, for investors, the latest statement moves
policy one step closer to tightening.
"If growth continues at this pace--we think it will--the first
Fed tightening could easily come in the spring, especially if wage
gains start to pick up," said Ian Shepherdson, chief economist at
Pantheon Macroeconomics.
Reflecting jitters about when the central bank might increase
rates, the Treasury's seven-year note auction Thursday afternoon
drew a light crowd. The $29 billion offering booked enough bids to
cover the sale 2.42 times--the lowest cover ratio since November
2013. Buyers demanded a 2.018% yield on the notes, which was higher
than the going market rate at the time of the sale, reflecting soft
demand.
Still, the lack of inflation in the U.S. and around the world
remains a concern for economy watchers and a key factor keeping
bond buyers around.
Within Thursday's GDP report, the price index for personal
consumption expenditures rose at a 1.2% annual rate in the third
quarter, from 2.3% in the second quarter.
Sharon Stark, fixed-income strategist at D.A. Davidson Co., said
weak inflation numbers of out Europe also added to support for
Treasurys. Germany's consumer-price inflation unexpectedly slowed
this month, rising 0.7% annually from 0.8% in September.
"Treasury yields could trade lower into year-end just because
you get episodes of geopolitical unrest and disappointing numbers,"
Ms. Stark said, calling the 3.5% third-quarter GDP growth result
"unsustainable." Her year-end forecast for the 10-year yield is
2.20% to 2.25%.
Muted inflation readings have also put Treasury Inflation
Protected Securities, or TIPS, under pressure. That has narrowed
the gap between yields on 10-year Treasurys and 10-year TIPS, which
reflects investors' average annual inflation expectation for the
coming decade. That gap recently stood at 1.91%, from 2.25% at the
start of the year.
But Unlike Ms. Stark's lower-yield forecast, many analysts still
believe strong U.S. growth will eventually trump concerns about the
global economy and lift the U.S. 10-year yield toward 2.75% in the
coming months.
Economists at Capital Economics are among those who see rising
yields, expecting the Fed to increase interest rates in March and
forecasting a 2.80% yield on 10-year notes at the end of that
month.
Write to Cynthia Lin at cynthia.lin@wsj.com