2-year Treasury yield falls to 4 week-low on soft inflation reading

Treasury yields fell sharply Friday, extending a weekly skid, after the initial snapshot of first-quarter GDP showed the U.S. economy grew at a faster-than-expected clip.

The 2-year note yield, sensitive to shifting expectations for monetary policy,TMUBMUSD02Y, -2.38% retreated 4.2 basis points to a four-week low of 2.288%, contributing to a weekly decline of 9.5 basis points. The 10-year Treasury note yieldTMUBMUSD10Y, -1.49% slipped 3.1 basis points to 2.506%, contributing to a weekly drop of 5.8 basis points. Both maturities marked their biggest weekly falls since March 22.

The 30-year bond yieldTMUBMUSD30Y, -0.59% fell 2.2 basis points to 2.926%, extending its weekly decline to 3.7 basis points.

Prices for bonds move inversely to yields.

The first estimate of gross domestic product showed the U.S. economy grew at an annual pace of 3.2% in the first three months of 2019, from 2.3% in the fourth-quarter of 2018, well above analysts’ estimates of 2.3% in the first three months of the year. Despite expectations for the fiscal stimulus of tax cuts to fade and global growth concerns to weigh on the domestic economy, the recent data underscores the U.S.’s resilience.

See: Economy grows 3.2% in first quarter, GDP shows, much stronger than anticipated

Read: GDP ‘stomped’ estimates, but some factors appear unsustainable, economists say

But yields retreated sharply as investors keyed into the weaker core personal-consumption expenditures number, which strips out volatile food and energy prices. The Fed’s preferred gauge of inflation, core PCE fell to 1.7% in the first-quarter, from 1.9% in the previous three-month period.

A moderation of inflation pressures reduces their corrosive influence on a bond’s fixed-interest payments, boosting prices for government paper and dragging yields lower. The slower inflation has also energized bets that the Fed will cut rates by 2020.

”The Fed has two goals. Their job is to keep inflation in control, but inflation is not hitting its target. There’s no reason for the Fed to tighten at all,” said John Bredemus, head of capital markets at Allianz Investment Management.

“The bond market is saying inflation is dead, rates are not going up. You look at this core PCE number, it’s pretty low. If that’s sustained, the next move will have to be a rate cut,” said Bredemus.

Besides expectations for more easy monetary policy, market participants also said the rally in government paper this week could reflect that foreign bond buyers still found the higher-yielding U.S. bond market alluring.

“On a relative basis, U.S. rates looks quite attractive, that’s part of what playing into the flat yield curve, and the depression of longer-dated yields,” said Gautam Khanna, a portfolio manager at Insight Investment.

In other data, the University of Michigan reported its April’s consumer-sentiment index came in at 97.2, from 96.9 in March.

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