TREASURIES-US yields slip as investors await PCE inflation data

Credit: REUTERS/Yuriko Nakao

By Herbert Lash

NEW YORK, Feb 28 (Reuters) - Treasuries yields edged lower on Wednesday after solid economic growth in the fourth quarter barely budged bonds as investors await key inflation data that could provide new insight into when the Federal Reserve cuts interest rates.

Gross domestic product increased at a 3.2% annualized rate, revised slightly downward from the previously reported 3.3% pace, the Commerce Department's Bureau of Economic Analysis said in its second estimate of fourth-quarter GDP growth.

Economists polled by Reuters had expected that GDP growth would be unrevised.

The two-year US2YT=RR Treasury yield, which reflects interest rate expectations, fell 4.2 basis points to 4.671%, while the yield on the benchmark 10-year note US10YT=RR was down 3 basis points at 4.286%.

The market's initial reaction to the GDP data pushed yields lower due to month-end buying, said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York.

The market is worried that the personal consumption expenditures (PCE) price index, which will be released on Thursday, may come in hotter than expected, echoing the release of the consumer price index (CPI) two weeks ago.

"The worry is that perhaps it's a little hotter than the market is going to expect it to be just after the CPI," di Galoma said.

The PCE, the Fed's preferred inflation gauge, will likely show prices rose 0.3% on a monthly basis in January, while core PCE likely rose 0.4%, according to a Reuters poll.

The consumer price index increased 0.3% last month after gaining 0.2% in December, the Labor Department said.

There is a much closer alignment between Treasury market expectations and what the Fed has indicated regarding the outlook for interest rate cuts, said Kevin Flanagan, head of fixed income strategy at WisdomTree.

"The Fed finally got the message that without them pushing back, the market was just going to go along its merry way and expect a far more optimistic rate cut path than perhaps what the Fed was thinking," Flanagan said.

"It's just been a whole variety of different Fed speakers who have come out suggesting rate cuts are probably coming later this year. The market is finally taking that to heart."

Fed funds futures show a 63.4% chance that the Fed starts cutting rates in June, with a 36.4% probability of no cut at all, a sharp reversal from bets on Feb. 1 of a 62% chance of a cut in March, according to CME Group's FedWatch Tool.

Futures traders also are betting on about 81 basis points of cuts by December, about half the amount they anticipated at the end of last year. FEDWATCH

The yield on the 30-year Treasury bond US30YT=RR was down 2.2 basis points to 4.418%.

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 -38.7 basis points.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.33%, indicating the market sees inflation averaging 2.3% a year for the next decade.

(Reporting by Herbert Lash; editing by Jonathan Oatis)

((herb.lash@thomsonreuters.com; 1-646-223-6019; Reuters Messaging: herb.lash.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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