Treasuries See Further Upside On Continued Decline In GDP

After an initial pullback, treasuries moved higher over the course of the trading session on Thursday, extending the upward move seen late in the previous session.

Bond prices pulled back off their best levels of the day but remained in positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 5.3 basis points to 2.681 percent.

The ten-year yield closed lower for the fifth time in six sessions, ending the day at its lowest closing level in well over three months.

The continued strength among treasuries came following the release of a Commerce Department report showing a continued contraction in U.S. economic activity in the second quarter of 2022.

The Commerce Department said real gross domestic product decreased by 0.9 percent in the second quarter after slumping by 1.6 percent in the first quarter. Economists had expected GDP to increase by 0.5 percent.

With GDP unexpectedly declining for the second consecutive quarter, the data signals the U.S. economy is in a technical recession.

However, economists cast doubt on whether the economy is actually in a recession, citing other indicators showing continued growth and persistent strength in the labor market.

The data may have still added to optimism that the Federal Reserve will slow the pace of its interest rate hikes at future meetings.

“Stagflation is obviously here now and will ultimately force the Fed into a difficult decision as to when they may need to pause tightening,” said Edward Moya, senior market analyst at OANDA.

A separate report from the Labor Department showed a modest pullback in initial jobless claims in the week ended July 23rd.

The report showed initial jobless claims edged down to 256,000, a decrease of 5,000 from the previous week’s revised level of 261,000.

Economists had expected jobless claims to inch up to 253,000 from the 251,000 originally reported for the previous week.

Treasuries may also have benefited from the Treasury Department revealing well above average demand for this month’s auction of $38 billion worth of seven-year notes.

The seven-year note auction drew a high yield of 2.730 percent and a bid-to-cover ratio of 2.60, while the ten previous seven-year note auctions had an average bid-to-cover ratio of 2.39.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

A report on personal income and spending is likely to attract attention on Friday, as it includes a reading on inflation said to be preferred by the Fed.

Traders are also likely to keep an eye on reports on Chicago-area business activity and consumer sentiment.

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