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Short-term US government bonds rally after disappointing GDP data

Short-term U.S. government debt rose on Thursday after data showing the U.S. economy contracted unexpectedly in the second quarter prompted traders to trim expectations for interest rate hikes by the Federal Reserve.

Yields on two-year Treasury bills, which are sensitive to monetary policy expectations, fell 0.1 percentage points to 2.86%, as debt soared in price.

The drop in yields came after a report from the US Bureau of Economic Analysis showed that the world’s largest economy shrank at an annual rate of 0.9% in the second quarter of the year, much worse than expectations for a 0.5% increase.

The unexpected drop came after gross domestic product fell 1.6 percent in the first three months of the year.

Two consecutive months of contraction meet the technical definition of a recession, though a separate body called the National Bureau of Economic Research won’t weigh in until much later to determine whether the economic cycle officially turned at the start of this year.

After opening the day higher, the blue-chip S&P 500 changed course to drop 0.7%. The tech-heavy Nasdaq Composite fell 1 percent after Facebook owner Meta reported its first year-over-year quarterly revenue decline, sending the stock down 8 percent.

The GDP report comes a day after the Fed Raised the prime rate By 0.75 percentage points this is the second month in a row. However, markets focused on comments from Chairman Jay Powell, who said the central bank was open to the possibility of smaller increases in the future.

“At some point, it will be right to slow down. . . . We might make another unusually large increase [in September]But that’s not a decision we’ve made at all, we’re going to be guided by the data,” Powell said.

said traders and strategists Powell’s proposal that monetary policy decisions Will depend on the data indicated a lower likelihood of large rate hikes in the future.

“It does suggest less dramatic increases over the next three [Fed] meetings than in the last two,” said Tai Hui, market strategist at JPMorgan Asset Management, adding that the latest readings on “inflation and labor market dynamics. . . Now it signals the need for a more cautious approach for next year.”

Thursday’s disappointing data further lowered expectations for a Fed rate hike for the rest of this year, with federal funds futures signaling the central bank’s main interest rate will average 3.2% in December from estimates of 3.265% a day earlier. .

Expectations rose as high as 3.605% just two weeks ago before a string of weak data led market participants to expect a more June policy path from the central bank.

Short-term US government bonds rally after disappointing GDP data Source link Short-term US government bonds rally after disappointing GDP data

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