Ten-year Treasury yields hold just below 5% ahead of GDP report

The initial jump, to once again flirt with 16-year highs, came as traders continued to absorb data — such as stronger-than-expected new home sales published Wednesday — that shows the U.S. economy remains in relatively robust health despite the Federal Reserve’s campaign of interest rate rises.

U.S. economic updates set for release on Thursday include third-quarter GDP, weekly initial jobless claims, and the September readings for durable goods orders, the trade balance in goods and wholesale and retail inventories, all at 8:30 a.m. Eastern. Pending home sales for September will be published at 10 a.m..

The Fed’s favored inflation gauge, the core PCE index, will be released on Friday, and ahead of these economic updates markets are pricing in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 29%, while the central bank is not expected to take its Fed funds rate target back down to around 5% until September 2024, according to 30-day Fed Funds futures.

Also seen weighing on bond prices of late are concerns that the market will struggle to absorb the supply of Treasuries.

“The latest refunding announcement occurs next week with fears over increased auction sizes creating some of the issues yesterday including a weak 5-year auction…which cemented the last leg of the sell-off [on Wednesday],” said Jim Reid, strategist at Deutsche Bank.

The Treasury will auction $38 billion of 7-year notes at 1 p.m. Eastern.

German 10-year bund yields
BX:TMBMKDE-10Y
were little changed at 2.882% ahead of the European Central Bank’s monetary policy decision on Thursday. The market expects the ECB to keep its deposit rate unchanged at 4%.

What are analysts saying

“The United States is expected to showcase its economic strength later today, highlighting its economic exceptionalism,” said Stephen Innes, managing partner at SPI Asset Management.

“The preliminary report on Q3 GDP is anticipated to reveal that the largest economy in the world expanded at a pace of 4.6% in the last quarter. This figure reflects the resilience of the American consumer and a growth trend that remains robust despite the Federal Reserve’s efforts to temper inflation by engineering below-trend growth,” Innes added.

“If this economic strength persists, it could prompt the Federal Reserve to delay the first rate cut further or even implement another rate hike, which could be detrimental to equity valuations but drive flows back into the dollar,” Innes concluded.