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Treasuries Rise as U.S. Economic Contraction Clouds Fed Outlook

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Treasuries rose, pushing the 10-year note yield to a three-week low, as revised data showed that the U.S. economy shrank in the first quarter, signaling that the Federal Reserve’s path to higher interest rates is uneven.

While there were renewed signals from the central bank that it plans to raise interest rates this year, traders aren’t predicting more than one increase anytime soon and a Morgan Stanley index suggests policy makers won’t act until December. Treasuries have expanded their yield premium to German government securities, adding to the allure for overseas investors.

“Investors sense the rout the Treasury market suffered was mainly technical in nature and represents a fairly decent buying opportunity,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York.

Ten-year yields fell one basis point, or 0.01 percentage point, to 2.12 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data prices. The benchmark 2.125 percent note due in May 2025 was at 100. The yield declined nine basis points this week.

Yield Difference

Treasury 10-year yields exceeded German bunds by 1.64 percentage points from 1.52 percentage points two weeks ago.

Demand was also bolstered as money managers added longer-term Treasuries to align their portfolios with the bond indexes. The Barclays U.S. Aggregate index will extend its duration, which calculates how much prices change when yields rise or fall, by 0.12 year on June 1, compared with a 0.09 year increase in May.

“A lot of people didn’t think the data was going to play too much of a factor,” said Edward Acton, a U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. “It might be more of a month-end extension story.”

Gross domestic product in the U.S. shrank at a 0.7 percent annualized rate, revised from a previously reported 0.2 percent gain. A swelling trade gap subtracted the most from growth in 30 years as the appreciating dollar caused exports to slump while imports rose following the resolution of labor disputes at West Coast ports.

Traders assign a 24 percent chance that the Fed will raise interest rates in September, according to data from CME Group. The chance that the central bank will raise rates by the end of this year is 57 percent.

The U.S. central bank has held its target for the federal funds rate at virtually zero since December 2008 to bolster economic growth.

The Bloomberg U.S. Treasury Bond Index returned 0.5 percent this week through Thursday, set for its first gain since the period ended April 17. It’s still down 0.5 percent in May, on top of a 0.6 percent tumble last month.

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