Despite the U.S. gross domestic product meeting economic forecasts with a 4.1 percent growth rate in the second quarter, Treasury yields fell today with the benchmark 10-year Treasury down to 2.962 as of 2:00 p.m. ET. Similarly, the 30-year Treasury yield dropped down to 3.089.
Historically, strong GDP numbers are a precursor to higher yields, but according to analysts, yields dipped as a result of the personal consumption expenditure price index–the Fed’s preferred method of measuring inflation–it rose at a 1.8% annual rate during the second quarter, which was down from a 2.5% rate during the previous quarter. Rising inflation tends to hamper the interest payments provided by bonds.
“You take a look at the numbers a little closer, with regards to strong growth and inflation not really pushing higher, it’s a pretty good environment for the Fed, it doesn’t really change the current path they’re on, it doesn’t need to speed up or slow down. We’re kind of back to this Goldilocks environment, this is a perfect recipe for the Fed to hike rates,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
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The growth rate is the GDP’s fastest since the third quarter of 2014 and the third-best growth rate dating all the way back to the Great Recession. Furthermore, the Department of Commerce revised its first-quarter numbers to show a 2.2 percent increase rather than 2 percent.
Growth was spurned by a mix of tax cuts, deregulation and spending increases. Federal Reserve officials forecast GDP to rise 2.8 percent for 2018 in the aggregate, but diminish to 2.4 percent in 2019 followed by 2 percent in 2020.
ETF with Short Treasury Strategy Gains
One ETF that is benefitting from the fall in Treasury yields is the ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG). IGHG was up 0.27% today as of 2:05 p.m. ET and is up 2.36% within the last three years.
IGHG investment seeks investment results that track the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, which is comprised of long positions in USD-denominated investment grade corporate bonds issued by both U.S. and foreign domiciled companies and short positions in U.S. Treasury notes or bonds–the latter helping to contribute to its upward momentum today.
For more trends in fixed income, visit the Fixed Income Channel.