US Treasuries gain on weaker than expected Q2 GDP growth, low risk appetite

The US Treasuries gained on Friday after data showed that the second-quarter gross domestic product (GDP) increased weaker than expected. Also, investors poured into safe-haven instruments amid losses in riskier assets including stocks and crude oil.

The yield on the benchmark 10-year Treasury note fell 1-1/2 basis points to 1.498 percent, the yield on 5-year note dipped 2 basis points to 1.073 percent and the yield on short-term 2-year note fell 2-½ basis points to 0.695 percent by 12:30 GMT.

The advance second-quarter GDP reading increased +1.2 percent, well below market expectations for a +2.6 percent result, as compared to the revised +0.8 percent reading seen in the first quarter of 2016 (previous was +1.1 percent).

Alongside the weaker than expected headline result, this report clearly reflects the mixed tone of data seen throughout the quarter. Given the magnitude of the inventories decline seen in the advance release, we see this potentially signalling positive momentum on this front in 2H16.

Moreover, the Employment cost index increased +0.6 percent in the second quarter of 2016, in line with market expectations for a +0.6 percent result, from the unrevised +0.6 percent increase seen in the previous quarter.

In addition, crude oil prices hit its lowest since April following sluggish global demand and supply glut concerns.

Also, the EIA in its latest report mentioned that the US crude inventories climbed to a seasonally adjusted annual rate of 1.671 million barrels, the consensus was for a fall of -2.257 million barrels, as compared to -2.342 million barrels in the preceding month. The International benchmark Brent futures fell 1.34 percent to $42.66 and West Texas Intermediate (WTI) dipped 0.78 percent to $40.82 by 12:00 GMT.

On the other hand, the Federal Reserve Open Market Committee maintained a hawkish tone at the monetary policy meeting held Wednesday, while keeping the Federal Funds Rate unchanged. However, the Fed’s statement kept hopes alive for a rate cut in the future.

The central bank left the target range for the benchmark federal funds rate unchanged at 0.2-0.50 percent, a level since last December, when rates were hiked for the first time in seven years. The Fed mentioned that mounting risks to the US economy have subsided after the Brexit outcome and the labour market is showing signs of improvement.

The FOMC statement further mentioned that besides the job market, household spending has also started to improve and that economic activity has been expanding at a moderate rate; however, business conditions remain on a soft spree, the committee noted.

While, Fed Chairwoman Janet Yellen has repeatedly mentioned intentions of a gradual Fed rate hike, market volatility and the unexpected dip in job gains have upset the cause.

Meanwhile, the S&P 500 Futures trading down 3 points at 2,162 by 12:50 GMT.