US yields climb after GDP, claims data point to soft landing

U.S. Treasury yields rose on Thursday, after data indicated the economy was on solid enough footing to give the Federal Reserve room to be less aggressive in cutting interest rates this year.

The Commerce Department said gross domestic product increased at a 3.0% annualized rate last quarter, revised up from the 2.8% rate reported last month, while consumer spending, which accounts for more than two-thirds of the economy, increased at an upwardly revised 2.9% rate versus the previously reported 2.3% pace.

A separate report showed weekly initial jobless claims slipped to 231,000 last week, slightly below the 232,000 estimate of economists polled by Reuters and consistent with levels that indicate a steadily cooling labor market.

"The market marginally decreased the pricing for 2024 rate cuts on the better-than-expected revisions to GDP, which were largely led by a stronger consumer and the consumer strength is really what markets are focused on, rather than inflation," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

"Going forward, markets are going to be much more focused on employment and the state of the consumer for direction to gauge the magnitude of possible rate cuts."

The yield on the benchmark U.S. 10-year Treasury note US10Y rose 2 basis points to 3.862%, its fourth straight daily climb, and on track for its biggest one-day gain in a week.

Markets are fully pricing in a rate cut of at least 25 basis points (bps) at the Fed's September meeting, although expectations for a cut of 50 bps fell to 34.5% after the data, down from 38% in the prior session, according to CME's FedWatch Tool.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes (US2US10=RR), seen as an indicator of economic expectations, was at a negative 2.9 basis points after narrowing to a negative 1.4 bps, its highest since August 8.

The two-year (US2YT=RR) U.S. Treasury yield, which typically moves in step with interest rate expectations,

climbed 2.9 basis points to 3.896%.

The yield on the 30-year bond (US30YT=RR) advanced 1.5 basis points to 4.146%.

On Wednesday, Federal Reserve Bank of Atlanta President Raphael Bostic said that with inflation down farther and the unemployment rate up more than he anticipated, it may be "time to move" on rate cuts, but he wants to be sure before pulling that trigger. Bostic is also expected to speak later on Thursday.

Yields briefly moved higher after a soft auction of $44 billion in seven-year notes (US7YT=RR), the final auction of the week, with a below average demand of 2.5 times the notes on sale. The yield was last up 2.6 basis points to 3.763%.

Data on Friday in the form of the July personal consumption expenditures (PCE) will indicate whether inflation continues to cool.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) (US5YTIP=RR) was last at 2.056% after closing at 2.046% on August 28.

The 10-year TIPS breakeven rate (US10YTIP=RR) was last at 2.159%, indicating the market sees inflation averaging about 2.2% a year for the next decade.