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Treasury Yields Pop Higher After Economic Data Underlines Resilient U.S. Growth

U.S. Treasury yields rose Wednesday in a holiday-truncated week as a round of data highlighted a rebound in investment spending and suggested third-quarter economic growth may not have slowed as much as anticipated.

Due to the Thanksgiving Day holiday, the Securities Industry and Financial Markets Association recommends for the bond market to shutter on Thursday, and close early on Friday.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, 0.616% was up 2.7 basis points to 1.766%, while the two-year note rate TMUBMUSD02Y, 0.220%, sensitive to expectations for interest-rate policy, climbed 4 basis points to 1.624%. The 30-year bond yield TMUBMUSD30Y, 1.203% edged up 1.4 basis points to 2.191%.

What’s driving Treasurys?

Investors saw fresh reasons for optimism about the U.S. economy after a round of data showed growth and the labor market remained resilient. Expectations for a more moderate economic slowdown could help weigh on prices for government paper, which have surged this year as bond traders anticipated a sharp slowdown to prompt further interest-rate cuts from the Federal Reserve.

A revised estimate of third-quarter GDP showed the U.S. economy expanded at a 2.1% annual pace versus a previous estimate of 1.9%.

Separately, the number of people who applied for first-time unemployment benefits fell sharply in the week before Thanksgiving, putting claims back near historic lows. Initial claims declined 15,000 to 213,000 in the week ended Nov. 23, the Labor Department said, though many economists caution against reading too much into any one week’s worth of claims data around this time of year.

Also, orders for durable goods rose 0.6% in October, the government said, defying forecasts for a 1.1% drop, though most of the gain was tied to defense-related goods such as jet fighters and ships.

U.S. consumer spending rose in October for the eighth month in a row, a potentially good sign for the holiday shopping season that gets underway after Thanksgiving with Black Friday specials.

A gauge of inflation favored by the Federal Reserve dipped to a 1.6% yearly gain in October, from a previous 1.7% run rate, the government said. Personal incomes were flat, and consumer spending rose 0.3% while the savings rate ticked down modestly.

The Fed’s Beige Book said the economic outlook “generally remained positive.” The Beige Book is a summary of anecdotes from business contacts across the country that offers color on how the economy is doing.

However, the bond-market selloff helped to cheapen prices for government paper and attract demand for the last of three coupon-bearing debt auctions this week. The Treasury Department sold $32 billion of seven-year notes.

International trade policy also occupied the attention of bond investors, who remain fatigued on the conflicting headlines on the progress of trade talks in the past few weeks. President Donald Trump repeated on Tuesday night that the U.S. was very close to reaching a phase-one trade deal.

Yet worries abound that Trump could scupper negotiations by signing off on legislation supporting Hong Kong protesters, which Beijing has insisted would be tantamount to interference in its domestic affairs.

What did market participants say?

“The economic data continues to largely support growth, at least in the near-term,” said Kevin Giddis, chief fixed-income strategist at Raymond James. The stronger GDP and durable goods numbers “caused the longs to get a bit nervous,” he said.

“With the global manufacturing side of the economy still weak, and uncertainty around the outcomes on trade still with open issues, risks to the market remain. As we’ve been discussing, price action warrants respect but markets are thin and volatility and spreads near absolute lows,” wrote Gregory Faranello, head of U.S. rates for AmeriVet Securities. “Listening to the president last night, it still continues to be a familiar story: Done, but not done.”

By: Sunny Oh