10 and 30-year Treasury yields have biggest drops in two weeks despite strong U.S. GDP data

Data released on Thursday showed that the economy rose at a 4.9% annual pace in the third quarter, defying expectations for a slowdown. Economists polled by The Wall Street Journal had expected a 4.7% increase in gross domestic product, the official scorecard for the economy.

Meanwhile, durable-goods orders jumped 4.7% in September, mostly due to a flush of new contracts for Boeing airplanes, and initial jobless claims rose slightly to 210,000 for the week that ended Oct. 21. The U.S. trade deficit in goods widened 1.3% to $85.8 billion in September, according to the Commerce Department’s advanced estimate.

 Some investors and analysts said debt market traders may be making a mistake in brushing off the signs of economic strength. U.S. Treasury Secretary Janet Yellen, speaking at a Bloomberg event in Washington after Thursday’s GDP report, said she doesn’t see signs of a recession.

Meanwhile, markets priced in a 96.1% probability that the Fed will leave interest rates unchanged between 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. Traders pulled back on their expectations for a 25-basis-point rate hike by December, dropping that chance down to 24.2% versus 29.3% a day ago. They also now see a slight 2.9% possibility of a rate cut by the final month of this year.

Treasury’s $38 billion auction of 7-year notes was successful, according to BMO Capital Markets strategist Ben Jeffery, and extended Thursday’s rally in government debt, sending yields toward intraday lows.

German 10-year bund yields
BX:TMBMKDE-10Y
slipped 1.6 basis points to 2.867% after the European Central Bank kept interest rates steady as expected, by holding the deposit rate at 4%.

What analysts are saying

“There are already economists dismissive of Q3 growth as a fluke about to fade in the fourth quarter. It is too early to take slower growth for granted, however, especially after three quarters of consistently stronger-than-expected economic activity,” said Chris Low, chief economist for FHN Financial in New York.

“Growth this strong does not force a rate hike next week, but it means the Fed will indicate it is still contemplating higher rates. The Fed cannot declare tightening over with growth this strong and inflation still above target,” Low said in a note.