(Bloomberg) -- Treasury yields declined sharply led by short-dated tenors as traders pared expectations for how much policy tightening the Federal Reserve will do based on a weak initial estimate of the US economy in the second quarter.
Yields on two- to five-year notes tumbled more than 15 basis points, while the 10-year note’s yield fell as much as 13 basis points to 2.65%, the lowest level since mid-April. Swaps referencing Fed meeting dates now show traders expect the fed funds rate to peak around 3.3% before the end of this year, less than 100 basis points above its current level.
The move follows a dive in front-end rates Wednesday in the wake of the Fed’s decision to hike by three-quarters of a percentage point, to a range of 2.25%-2.50%, and comments from Chairman Jerome Powell that appeared to be taken as dovish by the market.
“The growing skepticism that the Fed will continue to deliver aggressive tightening has been emboldened by this morning’s numbers,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.
Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed Thursday. Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.
The yield changes steepened the Treasury yield curve, where widely watched segments including the two- to 10-year and the five- to 30-year inverted in recent weeks, signaling expectations the economy will weaken. The former remains inverted, at about minus 18 basis points; at one point Wednesday it reached minus 32 basis points, the deepest inversion since 2000. The five- to 30-year spread touched 34.4 basis points, the steepest since mid-March.
The GDP report illustrates how inflation has undercut Americans’ purchasing power and tighter Fed monetary policy has weakened interest rate-sensitive sectors such as housing.
In European government debt markets, Italian bonds outperformed as money markets pared European Central Bank tightening wagers. Italy’s five-year yield tumbled more than 20 basis points to 2.40%, while traders price less than 100 basis points of hikes by year-end, the least since mid-June.
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