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Treasury Bonds Rally After GDP Data Disappoints

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U.S. Government bonds were boosted on Friday, sending 10 year note yields to a 20 month low, after official data showed that the U.S. economy expanded at a slower pace than forecast in the last quarter.

Yields on U.S. 10-year Treasury notes fell to 1.68 percent following the announcement. Yields fall as prices rise.

The report showed that the U.S. economy grew by 2.6% last quarter, just below economists expectations of 3.2%, raising concerns that the worlds largest economy was losing traction amid faltering overseas growth.

The somewhat disappointing data raises the prospect of the Fed keeping its ultra-loose policy in place for a longer, encouraging investors to buy bonds in the US.

“Investors are nervous on the growth outlook,” Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG ’s private wealth management unit told the WSJ. “The data doesn’t bode well for the U.S. growth outlook in 2015 and the Fed is going to keep zero-interest-rate policy for longer.”

In Wednesday’s FOMC statement the Fed said it would look at a broad basket of factors, including international developments, before deciding on the timing for an interest-rate increase.

The Fed also stated that it will keep interest rates near zero at least until the middle of the year amid falling inflation driven by a more-than-50% decline in crude-oil prices. The relative strength of the dollar vs other currencies has also hurt U.S. corporate earnings and contributed to downward pressure in U.S. consumer prices.

Fed-funds futures, which are used to place bets on central-bank policy, showed Friday that traders see a 11% likelihood of a rate increase at the June Fed-policy meeting, according to data from CME Group Inc.

The odds were 14% before Friday’s U.S. data, falling from 26% one month ago.

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